Credit cards can be very useful to have in your wallet, but make sure you don’t get caught out by fees and charges.
Responsible and careful use of a credit card allows you to borrow money for nothing and enjoy a degree of financial leverage, convenience and freedom. But on the other side of the coin, they can also lead to high interest payments and getting into a debt that you may find yourself struggling to pay off.
However, the various pros and cons of credit cards largely depend on how you use them, and getting into a few good habits can help you to get a whole lot more about of them. The following takes a look at the various pros and cons of credit cards.
Instant and free money borrowing
Credit cards provide you with a quick and convenient way to make purchases which you don’t actually have to pay for at the time. You will not even have to pay interest on purchases, provided that you pay off the amount spent in full when the next bill comes in. Some credit cards charge no interest for a period of up to 56 days.
Additionally, there are special credit cards which offer an introductory period of up to nine months of interest-free purchases. Effectively, you will be able to buy something now and pay for it later, giving you the opportunity to save up the money afterwards, rather than having to wait.
However, it should also be noted, that using a credit card for other types of transactions, such as cash withdrawals or foreign currency purchases is generally not advisable. In such cases, interest is usually charged from the moment the transaction is made
Protect your purchases
Credit card companies are usually prepared to help you with handling any payment disputes. For example, if you purchase a product which turns out to be faulty, yet the seller refuses to give you a refund, then the credit card provider may be able to deal with the dispute for you.
By contrast, when you use cash, a debit card or cheque, you do not get the same degree of purchase protection. Likewise, if your card is stolen and used fraudulently, the card provider will refund the money in most cases, although this might not be the case if the lender determines that you were negligent.
Find out more about what you should use your credit card for. While you shouldn’t use your credit card for everything, there are some purchases that could be made easier by paying with it.
Transfer your debts
There is no shortage of balance transfer deals available in the United Kingdom. If you owe money on other credit cards, bank account overdrafts or store credit, then you may be paying high amounts of interest.
This can make it very difficult to get out of debt, and in many cases, it will even lead to your debt getting significantly worse.
Provided that your credit rating is still good, and you are able to apply for a balance transfer credit card, you will be able to switch your balances from one or more high-interest sources to the new card and not pay any interest on the debt for a certain amount of time.
Depending on the credit card, this can be as long as two and a half years. However, you will have to pay a transfer fee of up to three percent when you initially transfer the debts.
Falling into the debt trap
On the other hand, credit cards can be disastrous for those who are not careful with their finances. For some, the temptation to simply stick to making the minimum monthly repayments, spend right up to their credit limits and otherwise largely forget about the fact that they have to pay back the borrowings at some point may be overwhelming.
If you don’t get into the habit of paying your bills in full every month, you can quickly end up building up a large debt and paying high amounts of interest on it. 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.
Interest rates are not necessarily the only cost of using a credit card. Various other fees and charges, such as the following, may apply:
- Late or missed payment fines.
- Cash machine withdrawal fees (particularly when abroad).
- Unfavourable foreign exchange rates and fees on purchases and other transactions.
- Fees may be charged for exceeding your credit limit.
Some credit cards also have a monthly or yearly fee just to use them. However, these cards usually offer some additional features to compensate.
- How do credit cards work? – Credit cards can seem confusing but understanding the basics can transform them to a valuable tool
- What is a credit card? – What exactly is a credit card and what credit cards are available
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