Credit cards: the pros and cons

If you’re considering taking out a credit card, but you’re not sure if it’s the right option, this blog may be able to help you understand what benefits they can provide - but also what downsides there are to be aware of. 

How can I use a credit card to my benefit?

Some of the advantages of a credit card are:

• Improving your credit score. If you have a card and you use it little and often - by putting a small amount of money (say £100) on a credit card each month - and repaying it you can avoid paying any interest and improve your credit score. By making purchases on credit and repaying them on time, you can avoid paying any interest and prove you're able to borrow and repay it on time and in full.
• Cashflow. A credit card can let you buy an essential product or service but not pay for it until payday rolls around or you receive money you anticipate from another source, such as sale of a car or house- just make sure you don’t forget to pay it off!
• Spreading purchases out. If you need to make a large purchase, such as a home appliance, a credit card offers the advantage of spreading the cost over several monthly payments to make it more manageable. 
• Purchase protection. If you use your credit card to pay for large expenses - perhaps booking a family holiday. Booking these large expenses on a credit card gives you purchase protection. Any purchase between £100 and £30,000 made on a credit card are protected by Section 75 of the Consumer Credit Act. This means you can claim for a refund if your credit card is used fraudulently, as long as you weren’t negligent with it. Read more about Section 75 on the MoneySavingsExpert here.
• Interest free spending. If you need to make a purchase but you’ve not saved up enough yet, some credit cards offer a 0% interest period that effectively lets you borrow for free – providing you make your monthly payments. Even if you pay the minimum amount required per month, you’ll still be borrowing interest free until this period ends. You can find 0% credit card deals here. Here you have to remember to note down when your card will stop being interest-free. At this point it would be best to completely pay off your debt, otherwise you could be placed back on the provider’s standard interest rate – which can be quite high.

If you decide a credit card could be good for you, just try to keep your balances as low as possible. And most importantly pay them off on time, and in full, every month!

What can the downsides of credit cards be?

• The possibility of debt: The main risk of taking out a credit card is that you could put yourself in rising debt if you aren’t able to pay back what you borrow. Credit card providers can charge high rates of interest which can easily build up and make it hard to repay.
• Using them more than you should: It’s important with credit cards that you don't use all your available credit. Try and aim to spend less than 30% of your limit. Using more than 30% of your available credit can put a dent in your credit score.
• Affecting your credit score: if you let your credit card debt build up, or miss payments, this can negatively impact your credit rating. The lower your credit rating the harder it will be to apply for credit in the future
• Fees and charges: Credit cards can also come with fees and charges if you don’t meet your repayments or you exceed your credit limit - make sure you know what you’re getting yourself into.
• Limited usage: You might be restricted in how and where you can use your credit card. For example, many will charge you for withdrawing cash or using the card abroad.

Can you have multiple credit cards?

Yes you can, and it’s not always a bad idea. Having a credit card - or maybe even a couple of credit cards - isn’t always a bad thing. If you have multiple cards but pay off each balance on time and in full each month, it can actually improve your credit-to-debt ratio and therefore your credit score.

Sometimes credit card providers (typically American Express) aren’t accepted in stores, so at times, having more than one can be helpful. But for credit cards to have a positive impact on your life, you need to be vigilant in your spending and repayments. In addition to boosting your credit score, through various credit cards you may be able to earn:

• Cash back
• Air miles
• Rewards in points or vouchers for regular spending

While these benefits are nice, it’s important to not get carried away with the spending and always ensure you can afford to repay the balance in full. Be honest with yourself - if you find that you’re struggling to keep up with multiple cards, one card might just suit you better. Rewards are great but not worth getting into trouble over!

Click here to read our blog about managing multiple credit cards.