Credit cards: How to make the most of them and what to look out for
Just what exactly is so good about credit cards? As a tool to enhance financial flexibility, credit cards can be invaluable. We'll go through the main benefits of using a credit card over the course of this guide. . We'll also go over a few of the things you'll need to be wary of so that you can keep using your credit card responsibly without falling into insurmountable debt.
In This Guide:
- Instant loans
- Interest free periods
- Payment protection
- Be careful of spiralling debt
- Debt transfer
- Extra fees and charges
A credit card is essentially a fast and simple way to borrow money that you can then pay back more or less as you please. Of course, the longer you take to pay it back, the more you’ll actually be paying due to interest, but the option for flexibility is there should you need it.
Once you’ve received your credit card, you don’t need to keep re-applying every time you want to borrow money.
You can simply spend the credit as though it were your own money and pay it back as soon as is possible.
Credit cards therefore free you up from having to scrimp and save in preparation for any big purchases you want to make and instead allow you to buy what you want and pay off the balance steadily over time.
Interest free periods
In addition to the convenience, credit cards can, if used correctly, be an incredibly cheap way to borrow money. If you can pay back your balance in full each month, you’ll be charged little to no interest.
The cost of borrowing money on a credit card is calculated as an annual percentage rate, or APR.
So if your card comes with an APR of 8.5%, and you take a year to pay off the balance in a year, you will pay back what you borrowed, plus 8.5%. If however, you pay your balance off in full each month, you’ll only pay a fraction of this.
You should bear in mind that APR takes into account any additional fees associated with your card, not just the basic interest rate.
Many cards nowadays come with introductory periods during which no interest is charged whatsoever on purchases. So long as you pay enough of your balance of each month, you’ll be able to take advantage of this period, meaning that your credit card is essentially an instant, and totally free, loan.
Under Section 75 of the Consumer Credit Act, any purchases valued between £100 and £30,000 made on a credit card are protected. The protection here means that should anything go awry, whether it be due to the retailer in question going bust, or the goods never being delivered or even the purchase itself being fraudulent, you will be entitled to a refund provided by your credit card issuer.
The important thing here is that you are entitled to this money back, even if the retailer refuses you a refund. This level of payment protection is not provided with purchases made with cash or a debit card.
All of this means that, especially when making larger purchases, using a credit card can be a great idea.
Additionally, if you take out the right kind of credit card, you can earn reward points as you spend that you can redeem on things like flights or, sometimes, cash back.
If you use your credit card often to make purchases, and keep up with monthly payments promptly and consistently, you’ll also be rewarded with a steadily improving credit rating.
Be careful of spiralling debt
Given the ease of access to borrowed funds that a credit card provides you with, it can be easy to slip into a dangerous level of ever growing debt if you’re not careful.
It’s crucial that you budget carefully, making sure that you only ever spend as much as you can reasonably pay back on time. The longer you leave your balance unpaid, the higher it will become thanks to interest. To avoid this you should, where possible, pay off your balance in full each month.
Of course, this is not always possible, indeed that is why many take out credit cards in the first place, but nonetheless you should prioritise credit card repayments if you want to avoid fast growing debt.
Luckily, if you do find yourself swamped by high interest credit card debt, then you can buy yourself some time by transferring the debt to a different card.
You can take out a specialised balance transfer card that comes with a 0% interest introductory period. You’ll be able to transfer your existing credit card debt to this new card and thereby delay paying any interest for as long as the introductory period permits.
Extra fees and charges
As well as interest, credit cards can come with a whole host of other fees that can sting you when you least expect it if you’re not careful.
One of the biggest is cash advance charges. These apply when you withdraw money from an ATM using your credit card and can be rather large. As such, it’s best to only ever do this when it’s absolutely necessary. You should stick to making withdrawals with your debit card and only using your credit card to make actual purchases.
Most credit cards will also come with added fees for transactions made in foreign countries and sometimes in foreign currencies even when the transaction is completed at home.
You will also face extra charges for either missed or late payments and for exceeding your imposed credit limit.