When used carefully credit can have some surprising benefits. Here's how to make the most of the benefits and the traps to avoid to help you take your finances up a level
What does the term ‘credit’ make you think of? Not living with your means? debt? These concerns are certainly valid - taking out credit is a big decision and should be thought about carefully before you jump in. But what you may not know is that credit, when used responsibly, could help you to maximise your current finances. So if you decide to take out credit, here’s how to use it to take your money management to the next level and our tips on what to be careful about.
Get rewarded for your day-to-day spending
Sometimes it just pays to use credit. And it doesn’t even take any extra effort. There are a number of credit cards on the market that offer cashback or rewards every time you spend.
Cashback credit cards pay you a small amount of cash (usually paid annually or monthly) every time you spend on them. The amount you get back is a percentage of what you’ve spent, for example if your card pays 1.5% cashback and you spend £100, you’ll earn £1.50. Over time this can really add up.
With rewards cards, you earn points every time you use it, these points can then be redeemed against rewards such as free air-miles, money off your food shop, or your petrol. Just make sure you don’t overspend just because you want more points.
The key thing here is that there’s no need to overspend just because you have a credit card. Used responsibly, these cards can actually help you maximise your money by giving you something back on purchases you would have made anyway.
To maximise your credit card rewards or cashback:
- Choose rewards wisely
It’s worth making sure that the rewards interest you before you apply. For example, rewards you can only redeem in Tesco when you always shop at Sainsbury’s are pretty pointless.
- Use the credit card for your day-to-day spending
This allows you to maximise your rewards or cashback without spending more than usual.
- Always pay your balance off in full, each month
If you don’t, it’s likely that interest will cancel out and rewards you’ll earn. Make sure you don’t miss repayments by setting up a direct debit and choosing to pay the full statement balance.
Keep your money safe
Paying with a credit card can be safer than using your debit card, especially when you buy online. This is for two reasons:
- Payment protection cover
Credit card purchases worth £100 to £30,000 fall within section 75 of the Consumer Credit Act. This allows you to claim your money back straight from your credit card provider if your item is faulty or doesn’t show up.
Payment protection cover also applies to deposits and part payments. However, the £100 minimum applies per item, and shipping costs don’t count.
- Anti-fraud protection
Credit cards usually also have free identity theft protection. As the name suggests, this protects you should someone steal your details and start racking up charges on your credit card.
Spread the cost of expensive purchases
This benefit could help you become an even savvier budgeter. You probably already know how much you can afford to spend on big-ticket purchases, and saving for these things is typically the best and cheapest way to buy.
However, 0% credit cards mean that you could spread the cost of these purchases, interest-free, over a number of months. This can help you regulate your cash flows, and can make it easier to work the purchase into your budget. It means that if something unexpected comes up next month, you won’t be stuck because you bought a new fridge last month.
You’re more likely to be approved for these cards if you have a good credit score.
There are a few things to think about though. With 0% credit cards it’s important to make sure you’ve paid off the balance before the offer period ends. Any balance left after this time will attract interest, even though you made the purchase or transferred the balance during the promotional period. Your card’s APR (annual percentage rate) will depend on the provider and on your financial circumstances. However, 19% APR or even higher isn’t uncommon.