Knowing how to use a credit card correctly is very important: using a credit well can earn great rewards, but if used badly it can leave you badly in debt.
In good hands, a credit card provides a raft of benefits. While a credit card is effectively a short-term loan, there is actually a lot more to it than this. Some credit cards are best suited for dealing with existing debts, while others are good for making purchases and paying for them later.
Others are primarily designed to provide you with a way to improve your credit score. With rewards or cashback credit cards, you can even earn some extra cash. However, before you start comparing credit cards, it is essential to take into account some of the most important rules.
How not to use a credit card
Although there may be some exceptions depending on the particular lender in question, you should generally avoid using your credit card in the following ways:
Avoid using credit card cheques
These are no longer provided by any credit card issuers without your consent. If you have opted to receive them, or you still have some old ones lying around, you should avoid them completely.
Credit card cheques are typically treated in the same way as cash withdrawals, meaning that you will usually end up being charged additional transaction fees and higher interest rates.
Don’t withdraw money using a credit card
Unlike purchases, cash withdrawals on credit cards are usually charged interest from the moment the transaction is made. Interest rates on withdrawals are often higher than they are with purchases, and additional fees may also be charged. If possible, use your debit card and current account overdraft instead.
Avoid making any other cash advances on your credit card
Also avoid buying foreign currency or purchasing things like gift cards and vouchers. The rules vary slightly, depending on what the lender considers to be a cash advance. Just like cash withdrawals, any other cash advance made with a credit card is usually charged at a higher interest rate.
How you should use a credit card
Getting into the following habits will help you to get much more out of your credit card while avoiding paying high interest rates and descending into debt.
Pay off as much of the debt is you can each time your bill comes in
Doing so will usually allow you to avoid paying any interest at all for a month or more. If you have an interest-free period on purchases and/or balance transfers, feel free to pay off the debt later, but be sure to do so before being automatically switched to the lender’s standard rate.
Choose a suitable credit card
Some cards are designed primarily for dealing with debt, while others are better suited to purchases. Don’t just pay attention to headline interest rates. Instead, determine the reasons why you want to get a credit card before going ahead and comparing the various deals online. There are dozens of options to choose from.
Read our guide on what you should spend on your credit card for more information on how to use your credit card.
Pay off your bills on time
By paying off your bills before deadlines you can use your credit card responsibly as a way to improve your credit score. If you currently have a low credit score, then your options will typically be limited to taking out a credit builder card.
With such cards, interest rates are often very high, but they do give you an opportunity to improve your credit rating and expand your range of future borrowing options.
Look out for cashback and reward programs
Cashback and reward credit cards are very common, and they allow you to take advantage of special promotions with specific companies. For example, an airline credit card allows you to earn things like air miles, while a supermarket credit card may allow you to earn cashback on purchases made at certain outlets.
Protect your credit card using 3D Secure technology
This will prevent thieves from being able to use your credit card online. For Visa credit cards, you can use Verified by Visa. MasterCard uses MasterCard SecureCode. With this extra security in place, you will need to enter several random characters of a password each time your make a transaction.
If you would like to know more then read our 7 tips for first-time credit card holders.
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