Why might I need to use a credit card?
No-one technically needs to use a credit card, but they are often used to make large purchases. Many people also make most of their payments each month on their credit card in order to benefit from the provider’s offers, such as cashback, rewards and free cover on purchases if something goes wrong.
What is a credit card?
Credit cards allow you to borrow money to make purchases. They have a credit limit applied to them, which is tailored to your financial situation, your credit record and your requirements. If the balance on the credit card is paid off in full each month, no interest is charged on the balance and the borrower has accessed cheap credit. If, however, the borrower does not clear the balance each month, the card issuer will start to charge interest on the balance, which will also need to be repaid by the borrower.
However, these benefits are only useful if the borrower clears the balance on their credit card at the end of each month, by the date on their credit card bill.
Advantages of using a credit card:
- Cashback on purchases: A number of credit cards now offer cashback on purchases at a certain percentage of the total spend. The amount accumulated over the year is usually credited to the account annually. Some credit card providers will offer a larger cashback offer for a short period, while others offer a certain percentage off particular types of purchases, such as supermarket spending.
- Protection on your purchases: The Consumer Credit Act protects purchases valued at above £100 and under £30,000 if made on a credit card. This can protect you if, for example, you pay for flights on your credit card and the airline folds before the date of your journey. This protection means that it is often recommended that people take out credit cards in order to make large purchases.
- Rewards: A number of credit card providers reward their customers for spending on their cards by offering points which are usually exchanged for vouchers that can be spent on treats such as flights, hotels and other leisure activities and products.
- 0% balance transfers: Credit card providers offer extended interest-free periods, often up to around 20-30 months, to customers who transfer their existing credit or store card balances onto one of their credit cards. After the interest-free balance transfer period is up, the interest rate reverts to the standard balance transfer rate, which is often above 15 per cent.
- 0% interest spending: Card providers will sometimes offer customers interest-free purchases for a fixed number of months, allowing them to spread the cost of a large item. However, the borrower must keep up with minimum payments over the interest-free period.
- Cheaper spending overseas: Some credit cards will offer to waive the foreign loading fee charged on purchases made abroad, which can make buying big-ticket items when travelling a whole lot cheaper.
- Opportunity to build up your credit score: If you have a weak credit score you may still be able to get certain credit cards. Providing you spend on the card and repay the balance every month, this can help you to rebuild your credit score, helping you to get better credit deals further down the line.
Disadvantages of using a credit card:
- Interest is payable if you don’t clear the debt each month: This is the most obvious set-back to using a credit card. Interest rates on credit cards are usually higher than on overdrafts or personal loans and, therefore, they can be an expensive way to borrow money. If you take out a credit card to make the most of cashback or rewards but don’t repay in full, the interest you will pay will be much more than the savings or cashback you earn.
- You can run up unaffordable debt: If you borrow more on your credit card than you can afford to repay each month, which can be very tempting, you can very quickly run up debts that you will struggle to repay.
- Some borrowers overspend in order to earn rewards or cashback: The only way to maximise the benefit of cashback offers on credit cards is to only make the purchases you would normally make. If you start spending more to receive the rewards, you will not be benefitting financially.
- You can damage your credit score if you miss repayments: If you fail to make minimum repayments each month your credit score will be damaged.
- Applying for credit cards can harm your credit score: If you apply for credit cards and fail to meet the criteria, your credit score could be damaged so it’s worth researching whether you are likely to be accepted before you apply.
Will I be able to get a credit card?
If you have decided that you would like to take out a credit card, you will have to meet certain eligibility criteria before you are accepted. Most standard credit card providers will look at your financial situation and your credit record to make the decision as to whether to lend to you or not. There are credit cards that are aimed at those with weaker credit scores. These are often limited in terms of credit limits and interest charges can be high, so tread carefully.
There’s no denying that there are advantages to having a credit card providing you are confident in your ability to spend sensibly and clear the debt each month. If you do your research to find out the best deals and keep up with payments, you could stand to benefit from cashback, rewards and free cover on valuable purchases.