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MoneySupermarket: Millions resort to overdrafts and credit cards to bridge the gap to payday

People are finding themselves hit with extra charges as they resort to dipping into their overdrafts or use their credit cards to get them through to payday.

MoneySupermarket found that two in five consumers it surveyed admitted they have used an authorised overdraft - or extended their overdraft - to make ends meet, while just over a quarter have used their credit card to tide them over.

The comparison website said that people using a £500 overdraft could be paying extra charges of up to £360-a-year, while those turning to plastic could run up interest of around £77-a-year if they are only paying back the minimum amount each month.

Desperate times: People are turning to forms of credit when they're unable to live within their means during the month.

Kevin Mountford, the website's head of banking, said: 'The rising cost of living over the past few years has hit many people hard and it is easy from time to time to find yourself running short of cash and having to turn to existing savings or other forms of credit to tide you over.

'Our research shows that four in ten people will turn to their savings pots as a backup for extra cash, which is reassuring.

'However, for those relying on credit cards or their overdraft as a fall back until pay day, as our findings show, it really does pay to research your options and think about the additional interest you could end up forking out, beforehand.

'While using a credit card for everyday expenditure can be an effective way for people to manage their finances and build up their credit rating, it is essential they pay the balance off in full at the end of the month to avoid building up unnecessary interest.'

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While using an authorised overdraft or a credit card is infinitely more preferable than using payday loans for short-term cover, MoneySupermarket has suggested taking advantage of zero interest offers on credit cards to spread the cost of spending.

But people should be wary of the punitive charges that can occur when taking money out of a cash machine with a credit card, or by exceeding your overdraft limit.

Cashing in: Santander customers have been taking

Meanwhile figures from Santander have shown that holders of its 123 Cashback Credit Card are using it more often at petrol stations, department stores and supermarkets to take advantage of cashback of up to three per cent it provides.

It said that transactions at petrol stations and supermarkets rose 64 and 99 per cent in the first quarter of 2013 compared to 2012 - with total transactions rising 60 per cent. However, there are more card holders this year than at the same point last year.

The number of cards offering cashback rewards has grown in recent years as lenders and retailers find ways of attracting new business, and Santander said it has given customers £27.6million back since its 123 card launched in September 2011.

Supermarkets have been tapping into the cashback market by offering customers enhanced rewards for shopping at their stores - with Sainsbury's for example offering 5 per cent cashback in the first three months with its cashback credit card.

Not all reward cards offer cashback, with some offering other incentives to attract customers, such as the British Airways American Express card which rewards spending with Avios points which can be used to buy flights.

THE BEST OVERDRAFT OFFERINGS

There are a few current accounts on the market offering decent overdraft buffers or temporary interest-free periods that can help prevent hefty charges every time you dip in to the red.

It is important to remember though that you will still need to keep an eye on your outgoings as even with the best offerings you can be slapped with high interest rates and fees if you go beyond the buffer zones or after the temporary offer has expired.

Citibank's Plus Current Account offers customers a £500 free overdraft is they commit to transferring in at least £1,800 a month. International travellers might also find the added extras such as free family travel insurance appealing.

First Direct's First Account comes with a £250 interest and fee-free overdraft. It also offers you £100 to sign up and another £100 if you choose to switch to a different bank after less than a year. You do have to commit to depositing £1,000 into the account, otherwise you will have to pay a £10 monthly fee for the account.

Nationwide's Flex Direct account has a free overdraft offering for the first 12 months - the amount does depend on individual circumstances though. This account also pays you five per cent interest on balances up to £2,500, but there are conditions you must meet to get your hands on any interest, such as paying in at least £1,000 a month.

People switching to Norwich and Peterborough Building Society's Gold Classic Current Account can bag themselves a £250 interest-free overdraft for the first six months. The account comes with some added insurance protection and free debit card withdrawals while you are abroad. To hold the account you must pay in £500 a month.

For those wanting to beat bad habits, NatWest Select Account offers an Overdraft Control Service which will reject most payments, such as direct debits and standing orders, that would take your account beyond your limit. The OCS does not guarantee a block on all transactions - so watch out.

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