Making the most of a credit card
A credit card is a common way of taking out personal finance, but it needs to be treated with care to avoid pitfalls as time goes on. Choose Wisely has put together five reasons why using a credit card could be a choice for you.
1: It doesn’t have to be expensive
If you pick the right credit card it can bemore cost effective than a loan, especially if you’re borrowing smaller amounts of less than £2,000. Using a credit card to spread the costs of a larger purchase, such as a holiday or a new fridge, over the course of a few months can be more convenient that a loan, as long as you stick to your monthly payments. You can also benefit from interest-free periods of 59 days each month. This means that if you pay your bill off in full by the due date you won’t be charged any interest. Some credit cards also offer 0% interest periods ,which means that you don’t have to pay interest if you make the minimum monthly repayments and pay the full balance before the 0% offer ends. Whichever card you choose, always remember that with the average interest rate coming in around 18%, a credit card should always be used in the short term as the interest can mount up.
2: For purchase protection
One great advantage to credit cards is that if you pay for something that costs between £100 and £60,260 and it turns out to be faulty, goes missing or the company goes bust you can receive a refund from the card issuer. You’ll also have protection in the event of your card being used fraudulently as the card provider should cover your loss.
3: For spending abroad
A credit card can have better rates that changing your money into cash before you leave. Use our comparison tool to find a provider that charges no fees on purchases overseas or ATM withdrawals and keep this credit card just for holidays or spending abroad. Remember to pay off the balance in full at the end of your trip so any savings are not cancelled out by interest repayments.
4: To switch your balance
If you’re paying interest rates on existing cards of at least 18% then transferring that debt onto a 0% credit card can make financial sense. There will often be a transfer fee of around 3% to pay, but this can still be substantially less than interest paid if you stay with your existing card. The only rule is that you repay the debt in full before the end of the 0% period, as interest on any remaining debt will be high and you could fall deeper into debt.
5: For the reward scheme
Some credit cards offer incentives to customers, such as loyalty points, air miles or cashback,which can earn money as you spend on your credit card.This only works if you pay your bill in full, as otherwise the value of any rewards will be cancelled out by interest payments. Be savvy and match your credit card to your spending habits – if you travel frequently then an air miles account could suit you. Or, if you’re loyal to a certain supermarket and have good credit history then choose a credit card that rewards purchases made there. These cards can suit higher spenders, as the more you spend the greater the reward. Certain cashback cards will also offer high cashback rates for higher spending, such as 1% on purchases up to £3000 and 1.5% on purchases over.Cashback credit cards will also pay more for spending at specific shops or on specific purchases such as fuel.
Mark joined Choose Wisely in 2015. He continues to work in close contact with the providers, brokers and journalists operating in the world of consumer credit.