A credit card can be an easy and convenient way to build your credit score, get extra protection when shopping and even borrow money interest-free. However, credit cards can also lead to escalating debts, high interest rates and damaged credit scores. What's important is that you use them in the right way. Here's what you need to know.
In general, you can use a credit card for most of the things you'd use a debit card for. This means shopping, buying things online and making contactless payments. There are some areas where using a credit card can be more advantageous than using a debit card. For example, many offer great deals on spending abroad, and they offer better protection when buying goods and services.
However, there are some things you shouldn't (or can't) use a credit card for. For example, it's best to avoid using your credit card to withdraw money from an ATM, because there are often hefty fees involved. Similarly, although you can use your credit card to send money to a friend, it's usually not a good idea.
Convenience – You can buy things with a credit card and not pay for them until payday. If you pay off the balance in full, you won't even be charged interest.
Spreading costs – Credit cards allow you to purchase something and spread the repayments over several months. If you have a 0% purchase card, any spending will be interest-free, otherwise, you’ll have to pay for the privilege. Used wisely, this can be a great way of budgeting.
Boosting credit scores – Your credit score is what financial institutions use to decide whether to lend you money. It’s based on your history of managing credit. That means that people who have never had any loans or credit cards often have poor scores. Having a credit card and paying it off in full each month is a great way to boost your score. A better score means you’re more likely to be approved for loans, credit cards and mortgages, and you might get better rates too.
Added protection – Credit card purchases are covered by Section 75 of the Consumer Credit Act. This means if something goes wrong, and you paid for something that cost between £100 and £30,000 on your credit card, you have the right to claim a refund. This can be extremely valuable for big-ticket purchases like holidays. If you’re worried about debt, use a credit card for your big purchase and then pay off the amount immediately – you’ll still have the protection without the debt worries.
Avoiding interest – There are lots of interest-free credit cards on the market, which charge you 0% interest for a pre-agreed offer period. This can be for purchases, balance transfers, and even money transfers. If you qualify for one of these cards, it’s a great way to borrow money for free or spread the cost of purchases. Just make sure you pay off the debt within the offer period or you’ll be switched to a much higher rate. It’s possible to switch to a new 0% deal, but there is a risk you won’t qualify.
Cashback and rewards – Some credit cards offer rewards (such as air miles) or cashback on your purchases. This can be a great way to make some extra money, as long as you pay off your balance in full each month. However, many of these cards charge fees, so you need to make sure you’ll earn more than you spend. It’s really important not to miss repayments, otherwise the interest you owe could wipe out the benefits.
Debt management – Using debt to get out of debt sounds silly, but a card that charges a low or even zero rate of interest allows you to transfer what you owe and pay less interest. This can help you clear your debts much faster, but there is a fee for the transfer.
Spending abroad – Some travel credit cards offer no fees when you spend money abroad. By contrast, many current accounts and debit cards charge a fee for every transaction. Getting the right credit card could save you a packet if you’re a regular overseas traveller. However, if you don’t clear what you owe each month, you’ll usually pay interest, so check to make sure that interest isn’t more than you save in fees.
Debt – A credit card means borrowing money, which means debt. If you’re not paying the balance in full each month, and you don’t have a 0% card, then you’ll be paying interest. Over time, debt can spiral. This can have several negative impacts, ranging from a damaged credit score to having to declare yourself bankrupt.
Damaged credit scores – If you miss repayments on your credit card, it will damage your credit score. This has knock-on effects on other borrowing. In the worst case, no one will lend to you, but even if they do, you’ll typically face higher rates. It’s not just loans and credit cards, either; it could stop you from getting a mortgage.
Fees and charges – as well as interest, many cards also have fees and charges. For instance, you’ll typically be charged if you withdraw money from a cashpoint. If you have a rewards card there might be an annual fee. If you miss a payment or go over your limit, that could cost you too.
High interest – If you’re considering a credit card, look at the rate you’re offered carefully. 0% cards are a great way to borrow interest-free, but lots of other products will charge you a hefty interest rate for your spending. If you pay the bill each month, this won’t impact you, but if you miss a payment or overspend, it will hit you in the pocket.
Overspending – Using a credit card can make it easier to spend beyond your means. If you don’t manage it well, you could end up in a debt cycle that devastates your finances.
Choose the right card: Consider 0% options and rewards, look at fees, charges and interest rates and choose the best card for your needs
Make sure you can afford repayments: Never spend more than you can afford to repay. At the very least, ensure that you can afford the minimum monthly repayments each month
Pay more than the minimum each month: Making minimum monthly repayments often means you’ll be paying high interest for a long time, making borrowing money really expensive. If possible, pay more than the minimum each month to clear your debts quickly and spend less overall
Pay on time every month: Missing credit card repayments is bad news. It will impact your credit score, and you could end up in serious debt
Set up a Direct Debit: Setting up a Direct Debit is a great way to make sure you never miss a credit card repayment. At the least, you should create one that makes the minimum repayment each month, but if possible, set it higher. If you’re using your credit card for everyday spending, you should set your Direct Debit to clear the whole balance each month, so you don’t pay any interest
Don’t apply for too many at once / at the wrong time: Rejected applications can negatively impact your credit score. Lots of failed applications at once is a red flag to lenders. You might also want to avoid applications at certain times, for instance, right before you apply for a mortgage
Use less than 30% of your available credit: Using more than 30% of your available credit can damage your credit score, making it harder to get the best rates (or accepted at all) for things like loans and mortgages