Woman using contactess credit card in a cafe

Credit Cards

Used wisely, credit cards can mean we don’t run short just because money hasn’t come in yet. But used to plug a gap, when there’s just not enough money, they can cause disaster

What is a credit card?

A credit card lets us borrow money (credit) before paying it back, sometimes with interest. People who are good with money treat them like a loan that they have to pay off each month. We can sometimes pay essential bills with them but if the money won’t be there when the statement comes in, that’s risky.

With pressure on all of us right now to pay the bills and put food on the table, a credit card may seem like a tempting option, however if they aren’t used sensibly they can get us into more debt.

That’s why it’s important to choose the right type of credit card, and to know how to use it.

How they work

First you’ll need to apply for a credit card.

There are different types of credit card. Some offer us rewards depending on how we use them, others can help build our credit score and some allow us to transfer an existing balance (debt) on to a new card with lower or no interest.

It’s not guaranteed everybody will qualify for one – lenders will look at our financial history, earnings and credit score before they approve you. If we’ve ever been bankrupt or don’t earn above a certain amount, providers can reject the application. Lenders may also look at our credit history and assign a credit score, which will determine whether we qualify for their credit card.

If our application is accepted, lenders send a credit card in the post. It needs to be activated online, using a PIN number which will be sent separately.

We can then start using the card straight away. But before we do, there are some important things to remember:

Check the minimum monthly spend

There is sometimes a minimum amount customers have to spend each month on a credit card to avoid paying any fees. Find out what it is and think whether you are likely to be able to afford this each month. If you pay off the amount in full each month, you will not have to pay any interest.

If you are not able to pay the balance off at the end of the month, or you forget, you could end up in debt, with high interest rates and possibly extra charges.

Credit card debt in the UK

Stats: Latest figures from the Bank of England show that credit card debt in the UK stands at £69 billion. Since the coronavirus lockdown, borrowing on credit cards has actually fallen. It’s likely because we are being more careful with our spending and putting off buying big items like a car or household appliance. Many people also had nowhere to go and spend.

So, what are the pros and cons?

If you use your credit card properly, it can have a number of advantages:

Spreading out purchases: You can spread out the cost of a large purchase over several monthly payments.
Purchase protection: Anything you buy that is worth between £100 and £30,000 is protected by Section 75 of the Consumer Credit Act. This means if the seller goes bust, or if the purchase is faulty or goes missing, you can claim back the cost from your credit card provider. You’ll also be able to claim for a refund if your credit card is used fraudulently.
Buy now, pay later: You can buy a product or service but not pay for it until payday comes around and you can make your monthly repayment. Good for emergency buys.
Benefits and rewards: Many credit cards come with rewards that can be useful if you pick one best suited to you. For example, if you are a keen shopper you may benefit from a cash-back or store credit card.
Cutting down debt: With a balance transfer credit card you can transfer any existing debts on to one credit account – usually with lower or no interest. This means you reduce the amount of money you pay on interest, letting you pay off the debt quicker. There is often a ‘transfer fee’, though, so compare this to interest charges you’re already paying too.

If you don’t use your credit card sensibly, there are a number of disadvantages:

Getting into debt: The biggest risk of taking out a credit card is that you could get into debt if you aren’t able to pay back what you borrow. Some credit cards can charge high interest rates – sometimes over 20%. They add interest charges monthly to the statement and this can build up quickly if you don’t pay off the balance.
A bad credit rating: Letting your credit card debt build up, or missing payments, can affect your credit rating. The lower your credit rating the harder it will be to apply for credit in the future. Credit ratings also affect things like getting a decent mobile phone contract.
Hidden fees: Credit cards can come with additional fees if you don’t meet your repayments or you go above your credit limit.
Restrictions: You may be limited in how and where you can use your credit card. Some will charge you for withdrawing cash or using the card abroad, depending on what is written in the credit agreement. It’s boring but try to always check the small print.

Quids in! Top Tips for Staying Credit Card Savvy

  1. Don’t miss a payment – always keep on top of your balance and make a repayment every month. If you can, pay the full amount but always as much as you can afford. If you can’t even meet the minimum amount, you could be in debt crisis and it’s time to call a debt charity for help. See our Useful Links.
  2. Pay more than the minimum amount – pay off as much as you possibly can each month, ideally the full amount, so that you don’t have to pay interest and avoid going into debt
  3. Set up a direct debit – if you think you might forget to pay off your credit card each month, set up a direct debit for at least the minimum amount
  4. Take advantage of rewards – make sure you’re not paying extra for rewards or incentives that you wouldn’t use ie air miles if you don’t travel a lot
  5. Get a credit card to match your needs – before you apply for a credit card you should think carefully about what you will be using it for. If you are already in debt, you should consider a balance transfer card rather than a store credit card

Still not sure if it’s for you?

Quids in! says: “A credit card sounds like a great idea but think of it as a ‘debt card’. As soon as we spend on it, we owe money. If you don’t know for sure that you can pay it off, ideally the following month, it can be a slippery slope. If you’re confident you can, it can help with cashflow when we need things right now.”