Household debt is back at record levels as families use credit to finance home improvements, new car purchases, holidays and to consolidate other debts. While borrowing is, in itself, not a bad thing, the key to successful management of credit is to ensure that you behave with discipline and to use it safely.

There are many ways to borrow money but choosing the right method for you will be a decision based upon the amount that you need, how quickly you will be able to pay it all back, how financially disciplined you are and whether you have a problem with a poor credit record.

Make the right decision, and you will save yourself a lot in interest payments. Make the wrong one, and you could end up having difficulty repaying the loan or card every month and get into arrears and face a default or legal action. So it’s definitely worth taking the time to assess your options and being honest with yourself about your circumstances.

Choose a safe method of finance

Scenario 1: You have run out of money before payday

If you’re in this situation, you are far from alone. It’s estimated that 40 per cent of people have trouble making their money last until their next wage slip. There are plenty of companies who will offer a payday loan for amounts ranging from £100 all the way up to £1,000. Payday loans have received a bad press in recent years but rules about how many times repayments can be rolled over and a cap on charges have made them more manageable.

The rule for borrowing safely: Only take out a payday loan if you know that your financial situation will change quickly and that you’ll be able to repay the entire amount within the 30-day period. If you do this, then a payday loan actually compares favourably with other forms of borrowing (such as an overdraft).

Scenario 2: The overdraft

An overdraft with your bank usually gives you a degree of financial flexibility for up to a year after it is agreed. Banks will usually charge a set fee for an arranged overdraft but will start to levy considerable charges and high interest rates if you go into the red without approval first.

The rule for borrowing safely: If you do need an overdraft, make sure you agree it with your bank first because you risk having heavy charges levied if you don’t. If you do go overdrawn without prior approval and fail to rectify the situation, the bank may close your account. Also, make sure you keep an eye on your account and do not go over the overdraft limit.

Scenario 3: Credit cards

There are a myriad of credit cards and many offering a 0% interest free deal on purchases or balance transfers for an introductory period. It’s well worth taking advantage of one of these if you need to borrow less than £4,000. Remember, though, that the introductory period will usually be for a maximum of 18 months and, once it’s up, you’ll pay the card’s full interest rate on your balance.

The rule for borrowing safely: If you take out an interest free card, make sure you always make at least the minimum repayment on time, every time. If you don’t, then the card issuer will be within its rights to cancel the introductory period and charge you full interest on your balance. Also, make sure that you pay off the balance before your introductory period is up.

Scenario 4: Borrowing larger amounts

If you’re planning home improvements, a holiday, a new car purchase or want to consolidate other debts, then you’ll be looking for a more substantial sum. You have two main options here – an unsecured personal loan or a homeowner or secured loan. With an unsecured loan, you’ll be able to borrow up to £20,000 from some lenders (depending on your credit status) but with a homeowner loan you could potentially borrow six figures.

The rule for borrowing safely: Make sure that you apply for the amount that you realistically need. Leave yourself a bit of wriggle room but don’t be tempted to apply for much more than you need because then you may struggle with the repayments. While a homeowner loan may come with lower interest rates than an unsecured loan, if you fail to keep up with the repayments, the lender might take legal action to repossess your home.