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How to use a credit card effectively

Discover how to get the most from your credit card – learn how to avoid fees, spend wisely, and enjoy credit card benefits.

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A credit card can be a powerful tool if you do your best to follow a few simple rules.

Credit cards can be useful. They can help fund big purchases like holidays, giving you not only the money you need but a level of protection should things go wrong. They also help you build your credit score by showing financial institutions that you are a trustworthy borrower. And credit cards often offer up rewards just for using them.

However, if you don’t use your card properly, it might harm your credit score rather than help it. And if you’re not careful, you could end up paying large amounts of interest on top of your spending.

How to use a credit card

Using a credit card isn’t difficult. It’s a simple case of spending money and then paying it back:

  • Spend money: You can use a credit card to make everyday purchases in the same way you would a debit card or cash or help you pay for more expensive things. When you use it, you’re borrowing the money you pay out from your card issuer. You can spend up to an agreed limit, but you need to make sure you can pay back whatever you spend later.

  • Check your statement: After spending on a credit card, make sure you understand what you now owe, as well as how much time you have to make a payment towards that balance. 

  • Pay the money back: Ensure you deposit at least the minimum payment into your balance before the due date. If you don’t, you might have to pay extra fees and penalties, and could lower your credit score.

That’s a very simplistic explanation of how credit cards work. There’s a lot more to know, though, and if you really want to make the most of your credit card, you need to set some boundaries for yourself and use it correctly. 

How to pick the right credit card

There are many credit card providers, most of which offer a choice of different credit card packages. If you want to enjoy the benefits of using a credit card, you first need to find a card that matches your purchasing and repayment habits.

Consider all of the terms and conditions before you sign up. A credit card with a lower APR but fewer benefits might suit you if you don’t pay off your balance each month. A higher APR card could offer you more flexibility through a larger credit limit but is probably more suitable if you’re diligent about paying it back.

A higher limit might be tempting. The more you can borrow on your credit card, the more freedom you have. But make sure you’re realistic about what you need. It may not be a good idea to apply for a limit so low that you won’t be able to use your card. Conversely, you might wish to keep the limit within your means. In other words, it is important to ensure that the budget is low enough that it won’t cause you to overspend. Note that your credit score might also affect the limit available to you and the APR you’re offered.

How to apply for a credit card

Once you’ve done your research and decided on a credit card that seems like it might work for you, applying for it should be straightforward. Make sure you have all of your personal details on hand, as well as the details of any existing credit cards if you’re looking to do a balance transfer.

  • Understand the offer: Make sure you’re clear on the credit limits and APR of your intended card

  • Check your eligibility: Most providers give you a chance to see if you will be able to get a card before you apply – too many failed applications could affect your credit score, so it’s sensible to check first

  • Apply for the card: You can usually apply online and get approval quickly – some might even offer an instant decision

Read more:

How to get the most from a credit card

Credit cards can include lots of benefits, which are different depending on your particular card. It’s worth seeing what your issuer is offering and using your card to maximise these benefits.

Make the most of cashback Some cards offer cash rewards for using them. The provider may credit the money to your card or deposit it in your bank account. For example, a cashback credit card offering 1% cashback would give you £1 for every £100 spent. You get this payment either monthly or yearly. This gives you extra spending power and is a great enticement to use your card more often, but cashback cards have credit limits, interest and fees just like any other. Usually, cashback offers are found on credit cards with a higher APR, so make sure you can pay back what you spend as quickly as possible.

Use introductory offers Some cards include additional benefits like cashback in exchange for a higher APR or an interest-free period. You can also get cards with no balance transfer fees. All these offers could help you choose the right card for you—just be careful to note when any promotional periods end and make a budget before applying so you know what you can afford.

Build your credit A credit card can also act as proof that you can manage your borrowing. Credit builder credit cards are specifically designed for people who want to boost a lower credit score. These cards usually have a higher APR and a lower borrowing limit – but if you regularly clear your balance, you can improve your credit without paying too much interest.

Travel wisely

Travel credit cards can be a real help if you’re seeing the world. They might offer fee-free spending while you’re abroad or more favourable exchange rates compared to other forms of spending. Be careful, though – if your credit card isn’t specifically designed for travel, you might actually pay more if you use it overseas.

Read more:

How to manage a credit card well

A credit card can be a powerful tool if you do your best to follow a few simple rules. There will be difficult months, and the flexibility of a credit card means you might be able to afford a slip here and there, but it’s important to be clever about how you manage your card.

Pay in full If you don’t clear your entire credit card balance each month, you have to pay interest on the amount still owed. Although this might be negligible on smaller balances, credit card APRs can be high. Paying the minimum might help you avoid extra fees, but paying in full is the most cost-effective way to manage a credit card.

Clear your balance quickly All credit cards include an interest-free period, which means that – if you’re quick enough – you can pay back what you’ve borrowed and not incur any interest. This means that, aside from any fees, you can get the benefits of a credit card for free.

Set up a Direct Debit The worst thing you can do with a credit card is miss a payment. Not only does this mean you build up extra interest, but your card issuer can also issue you with penalties. Moreover, missing a payment can damage your credit score. Arranging a monthly Direct Debit from your bank account to your credit card is an excellent way to ensure that you at least pay the minimum required. If you talk to your card provider, you can usually set the due date of your bill.

How does credit card interest work?

Credit card interest can seem complicated. Frankly, it is, at least compared to other kinds of debt. The specifics differ depending on your card, provider, and how you use it. 

The first thing to note is that a credit card’s annual percentage rate – its APR – is separate from some of the card’s other fees. This makes it different from the APR figures attached to other borrowing.

Second, your card might not charge a single APR but multiple ones at the same time. These include:

  • Purchase APR: This applies to things you buy using your credit card. There is usually an interest-free period following a purchase, so if you pay your balance promptly you won’t have to pay any interest on purchases. 

  • Balance transfer APR: If you move a balance from one credit card to another, that balance might get its own rate. The quality of your credit rating usually determines the rate.  

  • Cash APR: Credit cards aren’t designed to draw out cash. If you do, your issuer is likely to charge a higher APR, and the interest may apply from the moment you make the withdrawal.

  • Penalty APR: If you miss a payment and don’t catch up within a certain period of time – usually around 60 days – you could trigger a penalty APR. This is typically much higher than your usual APR, and you will have to pay it for a long time.

Note that when you make a payment on your credit card, it typically goes towards the part of your balance which charges the highest APR first. It’s possible, if you pay off your card quickly and on time, that you won’t need to pay interest at all.

The minimum payment could be something like 1% of the outstanding balance plus any interest or default charges, but this depends on your card.

How is credit card interest calculated?

Calculating your exact APR can be difficult. Our credit card interest calculator can give you a broad picture of the interest you have to pay on your balance and how long it is likely to take to pay off. Look at your card’s terms and conditions to find out exactly how the numbers work for you and the amount you have to pay.

Usually, APR breaks down to a daily rate, and you pay interest at the end of your billing period based on your average daily balance along with any standard fees that apply. Credit card APR doesn’t include non-standard fees or charges.

Read more: Credit card balance transfers

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