If you're new to the world of credit cards, this one's for you. Here's an easy to understand guide.
A credit card allows you to borrow money to spend now, and then pay it back later. Whether you’re splashing out on a coffee or thinking about making a bigger purchase (such as buying a car), you can put it on a credit card.
They're just another way to pay, instead of using cash, PayPal, a debit card from your bank account or even an old school cheque. You can spend money up to the limit set by your credit card company. Then each month, you get a bill, listing all your spending for the last month.
The good news is that if you pay off the whole bill before the due date, you won’t have to pay any extra.
The bad news is that if you don’t pay off the whole balance, you will usually be charged interest – a percentage of the money you owe the card company – on top. Plus, if you don’t pay anything at all, or pay late, you could be charged fees as well as interest. If you can’t pay the whole bill, you risk the debt spiralling, as interest and charges get added each month.
Pros of credit cards
- Widely accepted in shops and online
- Safer than carrying cash. If your credit card is stolen, you can ring and cancel the card, and there is more chance of getting any missing money back
- Buy now, pay later can give you the breathing space to buy something while you are waiting for payday
- Easy way to spread a big purchase into small payments
- Bills can help with budgeting, as unlike cash you can see where your money has disappeared
- Chance to earn cash, loyalty points or air miles if you choose a reward credit card
- Extra protection if you have problems with goods or services that cost between £100 and £30,000
- Chance to build up a credit history, by spending on a credit card and paying your bills on time
Cons of credit cards
- Easy to overspend if you don’t keep an eye on your balance
- Expensive way to borrow, if you do not pay off the whole bill each month
- Debt can spiral if you only make the minimum payments and interest adds up
- Expensive extra charges if you miss payments, pay late or go over your spending limit
- If you miss payments or pay late, you may also lose any introductory or interest free offers, and damage your credit record
- Expensive to withdraw cash, because you start paying interest as soon as the cash is withdrawn, not just after the date on your bill. You are also likely to pay charges for any cash withdrawals
- Expensive to use abroad, with extra fees and other charges, unless you choose a credit card designed for travellers
Choosing a credit card
The big question when choosing a credit card is whether you will pay off the whole bill each month, or will only be able to pay off part of it.
- If you are sure you can pay off the balance in full every month, choose a credit card based on the rewards
- If you are likely to make minimum repayments, look for a low interest rate, called the annual percentage rate (APR)
- If you need a long time to pay off your balance, opt for a credit card with a long interest-free period, and try to find one with a low transfer fee
Remember, if you have a good credit score, you are more likely to get accepted for cards with higher spending limits, lower interest rates and better rewards.
But if you make lots of applications that are rejected, it will damage your credit score. Check your credit record with a service like ClearScore first, and only apply for cards you are more likely to qualify for.
Using a credit card
In an ideal world, you should aim to pay off your credit card bills in full every month, to avoid paying interest.
Top tips when using a credit card:
- Set up a direct debit to pay off at least the minimum repayment each month, and ideally the whole balance. This way, you will avoid charges for late or missed payments.
- Think of your credit card limit as a maximum not a target. Sadly credit cards don’t hand out free money. You still have to pay it back, and if you can’t clear the whole bill, you could end up paying much more in interest and charges.
- If you take out a credit card with an introductory offer, check when the offer ends. Aim to pay off your balance before the end of the offer, or make sure to move your balance elsewhere.