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How to make credit work to your advantage

Many of us think of credit as a necessary evil. And if you're not careful, it can be an expensive way to borrow. But sometimes using credit has its benefits.

07 November 2017 3 min read

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Many of us think of credit as a necessary evil. And if you're not careful, it can be an expensive way to borrow. But sometimes using credit has its benefits.

It’s important to be cautious with credit. But that doesn’t mean you shouldn’t use it at all, or only as a last resort. As long as you manage it well, credit can help your financial health, keep your purchases safe and even save you money. In fact, if you play your cards right, your weekly haul of groceries could pay for a meal out or even a weekend away.

A better credit score increases your chances of qualifying for a wider range of credit products, which means more choice. It could also save you money, because you might be able to get lower interest rates.

Your credit score is based on your record of borrowing in the past. To get a good credit score, you need to prove you’re able to manage and pay back your debts responsibly. This makes using credit a key part of building your credit score, improving it and maintaining it.

To improve your credit score as much as possible:

Always pay bills on time

This applies as much to credit cards and loan repayments as to utilities, phone bills and other credit accounts. By never missing a payment, you’ll show lenders you’re trustworthy and reliable.

Don’t use up too much of your credit limit

As a rule, try not to use more than 50% of your total credit limit. So, if you have 2 credit cards with a combined limit of £3,000, try using £1,500 or less. This is further proof to lenders that you’re able to manage your current debts.

Space out your credit applications

Too many credit applications within a short period can give lenders the impression that you’re struggling financially, even if it isn’t true. In general, try not to apply more than once in a three-month period, and use soft-searching where you can.

Credit can be a great way to buy something now if you don't have the cash upfront. And if you qualify for 0% interest in-store credit or a 0% interest credit card, then your monthly repayments won’t collect interest. This means you can spread the cost of your purchase for free.

Whether you qualify usually depends on your situation, including your credit report and score. Typically, there are also strings attached. You can get slapped with interest and fees if you miss repayments. In addition, 0% offers on purchase credit cards are usually time-limited, after which you’ll start collecting interest. So, to get the most out of a 0% offer, try to pay everything off before the interest-free period expires.

Paying with a credit card can be safer than using your debit card, especially when you buy online. This is for two reasons:

1. 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.

2. 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.

Sometimes it just pays to use credit. This can either be in the form of rewards — for example free air miles or money off your groceries — or literal cold hard cash.

Typically, you’ll need to borrow at least a certain amount in order to earn rewards or cashback on a personal loan.

By contrast, you usually collect rewards points or earn cashback on a credit card for every £1 you spend.

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 on petrol are pointless if you don’t have a car.

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.

You often hear people say that you shouldn’t use credit unless you absolutely have to. And that's a fair point - if you can't afford to borrow the money, it can quickly get costly and your finances can get out of control.

But sometimes, used responsibly, credit is a powerful way of improving your financial health. It can also make managing your money easier and bring some nice rewards.

Next step: Compare loans and credit cards on ClearScore without harming your credit score.

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