Are credit cards costing you more than you realise?

According to Finder, more than two-thirds of UK adults (68%) have a credit card as of November 2023, around 36.2 million people. Approximately 11.6 million credit card transactions happened per day in 2023. 

Having and using a credit card has become the norm to the point that we forget to consider the fine print.

Here are five things you may not know about credit cards that could be costing you (a lot):

Paying off the minimum payment each month is not enough.

Many banks as standard will offer you the choice of paying - a minimum repayment, the full balance, or something in between. It’s very easy to make the choice to simply make the minimum payment and think you are still paying off something. However, the Money Charity estimates that a credit card on the average interest would take 26 years and 8 months to repay if only making the legal minimum repayments each month. So if you do need to make a minimum repayment, try to make sure you don’t fall into the habit of doing this regularly.

Having, and using, a credit card isn’t necessary for a good credit score.

Using a credit card - and critically, paying it off - can help build and maintain a good credit score through a positive repayment history. But if you’re using a high percentage of your available credit limit or ever miss a payment, it can actually hurt your credit score. Things like being on the electoral roll, and keeping up to date with mobile phone subscriptions and utility bills can contribute as much - if not more more - to a high credit score.

Watch how much of your credit card limit you use.

While having access to a credit card can be good for your credit score, there are a few things to be aware of. Credit limit utilisation (how much of your credit limit you actually use) is something that’s monitored by the credit reference agencies - this means if you have a credit limit of £2,000 and you’re using £1,800 of it, you’re using 90% of your credit limit. The bigger your limit, the easier it is to use a credit card for a big purchase and as a result use a lot of your available limit.

According to Experian, using less than 25% of your credit limit is the best to maintain a healthy credit score. If you reduce your credit limit it can negatively impact your credit score because it will change the % of your balance you are using, so focus on paying off your credit card balance before doing this.Many banks will automatically increase your credit card limit, so if you find that the bigger the balance, the more you’re tempted to use it, you can ask your bank to stop doing this, or even reduce your credit limit.

Credit card interest rates aren’t fixed.

Research from Sainsbury’s Bank shows that 19% of those surveyed didn’t realise credit card interest rates could change. While you take out a credit card and get offered a certain rate initially,  card companies are free to increase the interest rate they charge on outstanding balances at any time. At the moment, Bank of England rates and inflation are making lending money more expensive, so many lenders are increasing their rates. An increase of just 2% annually can seem small  but it can add many months to how long it takes you to repay any outstanding balance.

Rewards can make you spend more.

Some credit cards offer benefits like points that can be exchanged for goods, and some offer discounts and cashback payments. While these rewards can seem enticing, they are also a way of encouraging you to spend more than you otherwise would. Numerous studies (like this) have found that credit cards feel less real or emotionally painful than spending cash or money from our own bank account.

Even if you are repaying your credit card in full every month, and avoiding paying 20%+ in typical interest, any rewards might be cancelled out by you spending more of your hard earned cash than you should. This can leave you with less savings and less options when life throws you an inevitable curveball.