Commercial Feature – Recent figures released by the Payments Council show that, for the first time ever, the number of payments made using debit cards has exceeded those made on credit cards.

Debit cards are now the most popular method of payment. With the number of payments made using debit cards increasing by 10% between July and September 2010 compared to only 5% growth for credit cards, perhaps consumers are more wary of racking up debts ahead of the Christmas holidays.

However, credit card companies are also getting tough. Whilst they are keen to attract new users their offers on switching make it tough for the so called ‘card tarts’ to move their balances from one provider to another just for the offers. Card companies are sharing information and using credit reference data to assess who are the better and more loyal customers before extending their cards. The number of users has dropped from 31.7 million in 2005 to 30 million today.

There is also good news in that the amount of loans being written off by banks and other lenders has fallen sharply in the third quarter of the year. This coincides with statistics that show that the number of bankruptcies fell to a five year low and housing repossessions dropped to the lowest level for two and a half years.

Credit cards have been just one source of debt management problems for consumers. With high interest rates compared to fixed term loans they are an expensive way to borrow for anything other than short term convenience. Debit cards, on the other hand, take money from current accounts so consumers can only pay what they have in their bank account (plus any overdraft!).

Debt management problems have been particularly severe during the recent downturn. With so many private sector workers either losing their jobs, having to accept reduced hours or pay cuts it is no surprise that family finances have come under strain. Access to cheap and plentiful credit has also dried up meaning that it has become increasingly difficult to borrow to pay off debt.

Some debt problems have been addressed by taking out consolidation loans. With loan companies being wary of who they accept it has been only those that have maintained good credit histories that have been able to borrow on lower cost terms. Mortgages have all but dried up for those with limited or no deposit so even taking out a secured loan has become a challenge as house prices have fallen and any equity stake that owners may have had has been reduced.

Now more than ever it is those with good credit histories and/or substantial deposits that have ready access to loan funding. With family finances stretched to breaking point many have woken up to the need to budget and pay off expensive debt first, and have a proper debt management plan.

But with every dark cloud there is a silver lining.

Supermarkets are emerging as powerful new finance providers in their own right. Tesco and Sainsbury’s both offer non secured loans at rates below those available through many high street banks. With loans charged at around 8.7% APR you could save a small fortune in interest over the term of any loan compared with the 16.9% or 19.9% APR’s charged by Halifax or Bank of Scotland. The best high street providers are Santander and the Post Office at 8.9%.

So choosing your loan provider is as important as checking the terms on offer. The supermarkets also offer club points for existing holders making a small, but sometimes valuable, extra attraction. As they are growing their financial services businesses they are also keen to accept a range of new customers. In addition to loans they also offer a wide range of insurance products and other services.

Debt management problems have taken centre stage for many families in recent times. Debt consolidation loans have been a saviour for many as they seek to reduce their monthly payments, however, for those with more serious debt problems it has been the Individual Voluntary Arrangement (IVA) that has helped most. IVAs were introduced during the 1990s as a way for those with debt problems to manage their way back to financial health over a few years. With the help of a licensed insolvency practitioner a borrower could come to an arrangement with lenders that saw payments made within what could be afforded without losing the family home. Whilst the lenders may have had to write off some of what was owed it provides a cost effective way of recovering some debt rather than losing the lot.

Provided at least 75% (by amount owed) of lenders agreed with the proposed repayments an IVA is a court approved way to get on top of debt management problems. After around five years any remaining debt is written off and the slate wiped (almost) clean. The credit history will be tarnished and it may take some time to rebuild a good credit rating but it is a far better option than insolvency.

There is evidence to show that women may benefit from an IVA more than men. With their average earnings more than 21% lower than men women could find themselves with debt problems more easily.

Despite the number of credit cards dropping over recent years the amount being borrowed has started to rise again. After months where the amount repaid exceeded that being borrowed October 2010 saw £302m more added to the total debt.

With Christmas coming and the inevitable stretch on family finances it is important not to exacerbate any existing debt management problems. This time of year is particularly challenging for those with younger children as they seek to make Christmas a memorable time of the year, but it is important to work out a budget and stick to it. Instil some financial discipline and only use credit cards for purchases that you know can be repaid in a short timeframe.

Otherwise, it may pay to look for a loan when in the supermarket!