Credit Cards
Credit cards are commonplace nowadays and paying with plastic has over taken paying with cash or cheque. Still regarded with suspicion by some folk they have been larger embraced by most people as a convenient and safe way to pay for most daily shopping and many of life's larger purchases. Used well and you can borrow for nothing, get extra protection on your purchases and possibly even reward points or cashback when you use your card. But, use a credit card unwisely and you could end up paying lots of interest and racking up a debt you struggle to pay off.
The marketplace is awash with credit card deals offering a bewildering array of deals and while headline offers sound great with low APR's and useful bolt on's like free insurance you need to really have your wits about you and make sure you have fully understood the full costs of any card before you sign up. As always the devil is in the detail and the detail is the small print.
The marketplace is awash with credit card deals offering a bewildering array of deals and while headline offers sound great with low APR's and useful bolt on's like free insurance you need to really have your wits about you and make sure you have fully understood the full costs of any card before you sign up. As always the devil is in the detail and the detail is the small print.
Lets start with the advantages of credit cards:
Instant Credit
The first and most important reason is that they are an instant line of credit in our pocket: If you need to buy something expensive that you can’t afford to pay for all at once, a credit card is ideal. If you don’t have the cash to hand – or even in your bank account – you can pay with a credit card and then spread the cost over a number of months.
Secure internet payment method
More and more of us now shop online and this trend is only set to grow, credit cards are perfect for this offering an easy and secure method of payment.
Consumer protection
This is a really important bit and often overlooked and not fully understood. You get more protection if you pay with a credit card than if you pay with a debit card, cash or cheque. If you buy something between £100 and £60,260 you will get your money back if it all goes wrong. In other words, if the company goes bust, or your purchase is faulty or doesn’t turn up, you won’t lose out because you can claim the money back from your credit card provider. This is because the contract to buy the goods is not only made between you and the seller but also the credit card provider who acts as the third party.
Protection against fraud - providing you have protected your security details
You’ll also have protection if your card is used fraudulently as your card provider should refund the money. You won’t get a refund though if your card provider finds that you were negligent so make sure you don’t write your PIN number down anywhere.
Instant interest free loans!
Not something you expect to get offered but in fact many credit cards offer 0% periods meaning you can effectively benefit from an free borrowing for a set time. You need to clear your balance before the 0% offer ends though otherwise you’ll be charged interest. The average interest rate is 18% - that’s quite high which is why you should pay your debt off before interest kicks in.
Easy way to manage your monthly cash flow
If you always pay your credit card balance off in full each month then effectively a card allows you to borrow all the months shopping for free.You usually get up to 59 days before your credit card bill needs paying and as long as you pay it in its entirety you won’t be charged interest. It also gives you a useful printed statement and record of all your purchases (and your partners on any joint card!) which can be useful for budgeting.
Some cards even offer incentives to spend, such as cashback, loyalty points or Avios air miles, which means you could actually make money from your credit card. These are only worthwhile if you pay your bill in full – otherwise the interest you’ll be charged will be more than the value of the rewards.
Switching your balance from another card
If you owe money on credit or store cards, taking out a new card can make good sense. You'll probably be paying interest rates of at least 18% on your current card deal, but you could cut that to zero by transferring your debt onto a 0% balance transfer card. You used to be able to transfer balances on to new cards for free but the card provides wised up to this trick a few years ago so now there will be a transfer fee to pay of around 3%, but it's worth it as it will still be less than the interest you'll be charged if you stick with your existing card. Remember you will still have to pay your debt off before the end of the 0% period though or change again onto another 0% deal with another transfer fee payable or you will be charged interest on any debt you still have at the standard card rate.
Improving your overall credit score
If you use your card correctly and do not incur any penalty charges for missed payments you can inprove your credit score quite a lot. All loan companies and Banks will look at your credit file before making a decision on whether to loan money to you be that with a credit card or a conventional loan. They really like to see that you have experience of having used credit before and have handled it responsibly. Someone who has never taken out credit can have quite a low credit score simply because they are an unknown quantity to the banks and not because they will make a bad customer. Another important point with credit card debt is that sometimes only paying off just the minimum balance for an odd month here and there can also be a positive influence on your credit score. It demonstrates to loan providers that you will be a good customer for them to make interest payments from.
Now for the bad bits!
Beware the debt trap
It's important to remember that a credit card is a form of borrowing. You buy now and pay later - and there are risks. Remember that the reason so many credit cards are available is that they produce enormous profits for the providers. This means that despite all the people able to manage their cards and not pay any interest there are still plenty of cardholders racking up huge payments for the companies running the cards.
If you don't pay off your balance in full each month, you will start to rack up interest at a relatively high rate. Your debt can therefore quickly spiral out of control, particularly if you pay off only the minimum monthly amount. One absolutely essential task after taking out a credit card is to ensure you set up an automatic payment from your bank to the card provider to pay your minimum statement amount every month. Do this even if you are confident you will always pay off the full monthly balance. If you miss a minimum payment you will be hit with an immediate late payment penalty charge and some cards carrying a special indroductory deal such as a low or zero APR may revert immediately to the standard card rate wiping out all the special deal you thought you had just got. Remember to think of your credit card only as a short-term borrowing facility.
Hidden costs
The interest rate is not the only cost of a credit card. Some cards carry an annual fee (especially those associated with other perks like 'free ' travel insurance cover A fee will be charged if you are late making your monthly payment, or miss it altogether. You'll also pay a penalty if you exceed your credit limit. So make sure you keep track of your spending and always pay your bill on time.
ATM cash withdrawls
Don't be tempted to withdraw cash on your credit card. Most card firms charge a fee to withdraw cash from an ATM, typically about 2%. You will also start to rack up interest immediately as there is no interest-free period on cash withdrawals.
Instant Credit
The first and most important reason is that they are an instant line of credit in our pocket: If you need to buy something expensive that you can’t afford to pay for all at once, a credit card is ideal. If you don’t have the cash to hand – or even in your bank account – you can pay with a credit card and then spread the cost over a number of months.
Secure internet payment method
More and more of us now shop online and this trend is only set to grow, credit cards are perfect for this offering an easy and secure method of payment.
Consumer protection
This is a really important bit and often overlooked and not fully understood. You get more protection if you pay with a credit card than if you pay with a debit card, cash or cheque. If you buy something between £100 and £60,260 you will get your money back if it all goes wrong. In other words, if the company goes bust, or your purchase is faulty or doesn’t turn up, you won’t lose out because you can claim the money back from your credit card provider. This is because the contract to buy the goods is not only made between you and the seller but also the credit card provider who acts as the third party.
Protection against fraud - providing you have protected your security details
You’ll also have protection if your card is used fraudulently as your card provider should refund the money. You won’t get a refund though if your card provider finds that you were negligent so make sure you don’t write your PIN number down anywhere.
Instant interest free loans!
Not something you expect to get offered but in fact many credit cards offer 0% periods meaning you can effectively benefit from an free borrowing for a set time. You need to clear your balance before the 0% offer ends though otherwise you’ll be charged interest. The average interest rate is 18% - that’s quite high which is why you should pay your debt off before interest kicks in.
Easy way to manage your monthly cash flow
If you always pay your credit card balance off in full each month then effectively a card allows you to borrow all the months shopping for free.You usually get up to 59 days before your credit card bill needs paying and as long as you pay it in its entirety you won’t be charged interest. It also gives you a useful printed statement and record of all your purchases (and your partners on any joint card!) which can be useful for budgeting.
Some cards even offer incentives to spend, such as cashback, loyalty points or Avios air miles, which means you could actually make money from your credit card. These are only worthwhile if you pay your bill in full – otherwise the interest you’ll be charged will be more than the value of the rewards.
Switching your balance from another card
If you owe money on credit or store cards, taking out a new card can make good sense. You'll probably be paying interest rates of at least 18% on your current card deal, but you could cut that to zero by transferring your debt onto a 0% balance transfer card. You used to be able to transfer balances on to new cards for free but the card provides wised up to this trick a few years ago so now there will be a transfer fee to pay of around 3%, but it's worth it as it will still be less than the interest you'll be charged if you stick with your existing card. Remember you will still have to pay your debt off before the end of the 0% period though or change again onto another 0% deal with another transfer fee payable or you will be charged interest on any debt you still have at the standard card rate.
Improving your overall credit score
If you use your card correctly and do not incur any penalty charges for missed payments you can inprove your credit score quite a lot. All loan companies and Banks will look at your credit file before making a decision on whether to loan money to you be that with a credit card or a conventional loan. They really like to see that you have experience of having used credit before and have handled it responsibly. Someone who has never taken out credit can have quite a low credit score simply because they are an unknown quantity to the banks and not because they will make a bad customer. Another important point with credit card debt is that sometimes only paying off just the minimum balance for an odd month here and there can also be a positive influence on your credit score. It demonstrates to loan providers that you will be a good customer for them to make interest payments from.
Now for the bad bits!
Beware the debt trap
It's important to remember that a credit card is a form of borrowing. You buy now and pay later - and there are risks. Remember that the reason so many credit cards are available is that they produce enormous profits for the providers. This means that despite all the people able to manage their cards and not pay any interest there are still plenty of cardholders racking up huge payments for the companies running the cards.
If you don't pay off your balance in full each month, you will start to rack up interest at a relatively high rate. Your debt can therefore quickly spiral out of control, particularly if you pay off only the minimum monthly amount. One absolutely essential task after taking out a credit card is to ensure you set up an automatic payment from your bank to the card provider to pay your minimum statement amount every month. Do this even if you are confident you will always pay off the full monthly balance. If you miss a minimum payment you will be hit with an immediate late payment penalty charge and some cards carrying a special indroductory deal such as a low or zero APR may revert immediately to the standard card rate wiping out all the special deal you thought you had just got. Remember to think of your credit card only as a short-term borrowing facility.
Hidden costs
The interest rate is not the only cost of a credit card. Some cards carry an annual fee (especially those associated with other perks like 'free ' travel insurance cover A fee will be charged if you are late making your monthly payment, or miss it altogether. You'll also pay a penalty if you exceed your credit limit. So make sure you keep track of your spending and always pay your bill on time.
ATM cash withdrawls
Don't be tempted to withdraw cash on your credit card. Most card firms charge a fee to withdraw cash from an ATM, typically about 2%. You will also start to rack up interest immediately as there is no interest-free period on cash withdrawals.