If used in the right way, credit cards can be a beneficial tool for managing your finances.
Credit cards are widely known for their borrowing capabilities, serving as a financial tool to pay for things on credit and allowing you to pay the money back with interest in instalments.
This method may have its appeal for people who do not quite have the available money to pay for things up front – but it can be costly, not to mention risky.
Besides the high levels of debt you could be racking up and paying back over several months, or even years, a missed payment could severely damage your credit rating and lead to additional penalty charges.
Essentially, if you plan to use a credit card to just borrow money, then you are looking at one of the most expensive ways to do it.
Therefore, you should avoid getting a credit card or consider your other options first, as all types of borrowing when made out of necessity can be very risky.
The other way to approach the credit card is as a spending tool. You avoid using the borrowing functionality by always paying off the credit card balance in full at the end of each month, but you reap all the benefits that come with credit cards.
In this guide we explain why you need a credit card to get the most out of your consumer capabilities and how to safely manage credit to avoid paying any interest and getting into debt.
How not to use a credit card
As mentioned above, do whatever you can to avoid borrowing on a credit card. That means always paying off your credit card balance in full at the end of each month.
To be on the safe side, set up a direct debit so that the money is always paid. Interest rates on credit cards are relatively higher than other mainstream forms of borrowing.
It’s also very important you never use the credit card to withdraw cash. If you want to withdraw money from a cash machine, always use your debit card, never a credit card.
Credit cards should only be used for purchases, because if you withdraw cash with a credit card you will be charged interest daily, usually from the moment you take the money out.
Many credit card providers will also charge you a fee just for taking the money out, even if the cash machine says it’s free.
Finally, be sure to stay within your credit limit, as going over it can seriously damage your credit score and may result in you having to pay a penalty fee.
Credit card protection
If you are able to manage your finances responsibly and can keep your spending under control without going into debt, then getting a credit card for one of its perks can be a great boost to your consumer power.
Under section 75 of the Consumer Credit Act, any purchases between £100 and £30,000 are protected, as the credit card issuer and supplier are jointly responsible if something goes wrong.
For example, say you buy a new computer online for £1,000. When it arrives you find that it won’t turn on and simply doesn’t work, though it doesn’t appear to be damaged, say, during delivery.
However, the online shop you bought it from does not want to accept responsibility and doesn’t feel like the faulty computer fits within their company policy for refunds.
If you contact your credit card issuer and explain the situation, and provide any of the necessary proof and documentation, they might still be able to refund you in spite of what the supplier has told you.
The same goes for companies that go bust and refuse to give you a refund.
Credit cards with rewards
Besides getting protection on purchases, credit cards can also give you some great rewards, which are best enjoyed if you always pay back the balance in full and on time.
One of the most obvious ways of getting more from your credit card is to take out a cashback credit card, which simply gives you money back on every purchase you make.
By the end of the year, you could have a few hundred pounds extra coming back to you to spend on whatever you like.
You could also use a 0% interest purchase credit card to better manage paying for something expensive like a new sofa, TV or even a train season ticket.
By paying up front with a credit card, you won’t need to pay off the balance immediately – just the minimum each month to repay it all within the 0% offer period.
Some credit cards have 0% offers going up to a year or even longer, so it’s a little bit like paying for something in instalments, just without the interest.
In terms of rewards there are also credit cards that give you discounts at certain shops and points to spend on flights and holidays.
Depending on your lifestyle, you could find a reward to suit you. Manage it correctly so that you are spending the same as you normally do and you’ll soon find yourself earning some rewards to use later on.
If you regularly travel, or even if you only take one holiday a year, getting a credit card just for using abroad can be really helpful.
Travel credit cards usually waive the foreign purchase fee, which can be quite expensive when spending with a debit card or ordinary credit card.
This means, you get something as close as possible to that country’s exchange rate without incurring any nasty fees.
Credit cards for bad credit
If you have bad credit or want to improve your credit rating, then getting a credit card could be really useful.
It may seem counter intuitive but if credit providers see that you are able to manage even a low credit limit with a high interest rate credit card, then you are more likely to be able to get access to better credit cards and loans in the future. It could also improve your chances of getting a mortgage in the future.
Your credit score is likely to improve if you regularly pay off your balance in full and on time.
Many of the credit card providers are more likely to lend to those who have struggled to get credit in the past.
If you use it simply to make purchases that you will be able to afford and pay off the balance in full and on time every month then you should see your credit score improve.
- How do credit cards work? Credit cards can seem confusing but once you understand the basics they can help you manage your finances.
- How to pay off credit card debt – To avoid unnecessary stress related to paying back your credit cards, here’s a step-by-step approach to pay back credit card debt, rebuild your credit score and regain your financial health.