How you use a credit card is different from how you spend money with a debit card or cash. The main downside of credit cards is that they're debt products. But there are benefits too, including borrowing money cheaply and building up your credit file.
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How to use a credit card
To get the most out of your credit card, you need to use it properly.
You can use your credit card to make payments in the same way you would use a debit card or cash. What's different is the fact that you have to repay the credit card provider (who essentially paid the money for your purchase in the first place).
The credit card issuer will usually give you between 45 to 56 days to pay them back. It's always better for you to pay off the balance in full, but you can do it in instalments.
Try to always pay off at least the minimum amount due. And you must pay it on time.
Avoid paying interest or late fees by setting up a direct debit from your current account. That way, you also will not forget to pay.
Make sure you get the right kind of credit card for you. Some cards are designed for dealing with debt, while others are better suited to regular spending. Do not only pay attention to headline interest rates, but think carefully about the advantages of each one.
Compare different types of credit card using our comparison table.
The benefits of using a credit card
The various pros and cons of credit cards largely depend on how you use them. Good spending habits can help you get a more out of them.
Instant and free money borrowing
With a credit card, you can buy something even when you do not have enough money in your current account. You just need to make sure you can pay it off later.
You can pay off your credit card balance in full or in instalments, whichever is more convenient.
But remember, the borrowing is only "free" if you have an interest-free credit card. The length of an interest-free offer varies from card to card. When you are accepted for a credit card, you may not get the full interest-free period - it depends on how the credit card provider views your financial situation.
It is inadvisable to use a credit card for cash withdrawals or foreign currency purchases. You'll be charged interest from the moment you make the transaction.
Improve your credit score
Your credit score gives an indication as to the state of your credit file. Your credit file is your financial record dating back 6 years. It shows applications for financial products like credit cards, mortgages and some current accounts.
Chances are, anyone who always repays their debts in full and on time will have a good credit rating. A good rating makes it easier to get different debt products in the future.
If you have never had a debt product before, there will be little evidence in your credit file to show you can repay money. Or, you might have a bad credit rating because of previously irresponsible financial behaviour.
Getting a credit card could boost your credit score. It will make you look like a safe option for credit card providers to loan money to.
Compare our best bad credit credit cards" to find a suitable one for you.
Get purchase protection
The biggest protection for credit card purchases is made possible under section 75 of the Consumer Credit Act 1974.
If the goods you purchased were faulty, damaged or were never delivered, and the retailer refuses to refund you, you can claim your money back though your credit card provider.
Section 75 makes the retailer and the credit card provider equally liable if something goes wrong.
For example, you used your credit card to purchase a new TV, which turns out to be faulty. You've contacted the retailer, but they refuse to refund you (or they've gone bust). Under Section 75, because the credit card provider is equally liable, it can refund you instead.
You can claim a refund, repair or replacement so long as the price of the goods or services you purchased were more than £100 and less than £30,000.
You will even be eligible for this consumer protection if you did not pay the total cost on your credit card. So, if you pay just the deposit with your credit card and the rest by cheque, you can still claim a refund for the full amount under this legal protection.
If something goes wrong with a purchase, you must first contact the retailer you bought the goods or services from. They may be able to help you directly.
If you cannot contact them, they have gone out of business or they refuse to refund you, it’s time to get in touch with your credit card provider. Make sure you keep track of any receipts to help the process run smoothly.
If your credit card company refuses your claim then you can refer the case to the Financial Ombusdman Service (FOS). They will act as an independent mediator and find a solution.
Some reasons you may not be able to claim are:
- You used a charge card or a store card to make the purchase
- Your purchase was under £100 or over £30,000
- You used a company credit card
- You used credit card cheques
- The purchase was made through Paypal (or any other third party seller)
Your credit card provide will often refund you if your credit card is stolen and used fraudulently. But if the lender determines that you were negligent, you will not get it back.
To protect your purchases online, credit cards also have 3D Secure technology. It's basically just an extra layer of security to make sure it's really you making an online purchase. Visa cards use Verified by Visa, while MasterCard uses SecureCode.
Transfer your debts
You may be able to transfer existing debts onto a 0% balance transfer credit card. So, if you owe money on other credit cards, bank account overdrafts or store credit that all charge you interest, you could make a saving.
You can put any money you save on interest towards paying off the debt itself. This reduces the chance of your debt getting significantly worse.
Not everyone can get a 0% balance transfer card, especially the ones with long interest-free periods. To get the best one, you need a really good credit rating and solid credit file.
Explore more about balance transfer cards.
Earn cashback or other rewards
You could even earn money as you spend money with a cashback credit card.
You can earn other rewards too. For example, airline credit cards let you earn air miles when you spend. And supermarket credit cards can earn you points to use in store.
See all our best rewards credit cards and learn more about them.
The downsides of credit cards
Credit cards can be disastrous for those who are not careful with their finances. Just because you can borrow money, does not necessarily mean you should.
Credit cards are not good long term options for borrowing.
Falling into the debt trap
It can be very easy to fall into the debt trap if you do not use your credit card wisely.
For instance, if you:
- Only plan to pay the minimum monthly repayment
- Always use the full amount of credit (in other words "max out" the credit card)
- Forget to make a repayment every month
Instead of thinking of your credit card as quick and easy money, you should consider it to be nothing more than a short-term loan. It may be called a "credit" card, but it is in fact a debt card.
Interest rates may not be the only added cost of using a credit card.
Other potential additional costs include:
- Late or missed payment charges
- Cash machine withdrawal fees (particularly when abroad)
- Foreign currency fees: eg, bad exchange rates
- Fees for exceeding your credit limit
- Monthly or yearly fee (just for having the card)
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What you can use your credit card on
You can use your credit card on goods and services, or to pay bills. Avoid using your credit card for cash withdraws because you will incur a charge and it damages your credit score.
Credit cards, particularly those with 0% interest, are well suited for big, expensive purchases. This is because you do not have to save up for the full amount of the item before you make the purchase. Instead, you can pay off the balance in instalments, as and when you do have the money.
As long as you meet the minimum payments each month and have an interest-free card, you should not need to pay interest on your purchase. You only pay back what you spent, nothing more.
And thanks to Section 75 and 3D Secure technology, using your credit card for big purchases gives you extra protection.
In shops you can use your credit card wherever it's accepted. Some shops may charge a fee for using a credit card because it costs them to pay the credit card provider for the transaction.
The top 4 things to buy on a credit card include:
- Travel cards and travel season tickets
- Holidays, hotels and flights
- One-off big purchases
- Christmas presents
1. Travel cards and travel season tickets
If you get the train to work and back 5 days a week, every week, chances are you already buy a monthly or annual train ticket.
By paying for a travel card or travel season ticket with a credit card, you can avoid having to pay that lump sum in one go, or taking out a loan to pay for it.
2. Holidays, hotels and flights
Paying for your holidays, including the accommodation and flights, on a credit card makes sense when it comes to protecting your large purchases.
It's not uncommon for travel agents or airline to go bust. If you do not yet have insurance, and did not pay using a credit card, you may not be able to get your money back.
Some holiday booking sites may add on extra fees at the checkout for using a credit card - so keep an eye out.
3. One-off big purchases
Credit cards are great for the one-off big purchases, like TVs, a sofa, or a new mobile phone.
Just like with a travel season ticket, if you have a 0% purchases credit card, you can spread the cost and avoid paying interest for a few months.
Some shops selling these expensive products offer ‘0% finance’ for a year or two, but they often mark up the prices as a result. Always shop around and compare prices before committing to make sure you're getting the best deal.
4. Christmas presents
Christmas comes but once a year, and it's an expensive time at that. But using a 0% purchase card for the bulk of your spending could help you tackle the cost afterwards.
However, paying off last year's Christmas may amount to the same as saving for Christmas this year. So if you can, it's better put money aside each month to save up gradually . That way you'll have enough when December comes around, and may even have some leftover if you managed to spend less that you budgeted for.
Any purchases over £100 be protected (by Section 75), so if the company fails to deliver your goods when it promised it would, you could get your money back.
What not to use your credit card on
Never use your credit card to withdraw cash. You'll be charged interest from the moment you take the money out of the machine, and will be charged the daily rate of interest until you've paid it back in full.
You may also get charged a fee for the withdrawal as well because it's seen to be the same as buying money with your credit card. Credit card issuers will charge you a high price for doing so.
Additional charges on credit card cash withdrawals are not limited to cash machines.
You'll incur extra charges if you use your credit card to buy foreign currency, betting chips in a casino, or gaming money on a gambling website. This is because you are, once again, using your card to buy money.
You can, however, use your credit card to buy vouchers for a specific retailer, as long as it's not used in exchange for money, like in a casino.
Credit cards are not best suited for long term loans. They're more effective for short-term borrowing and spending tools.