While running up unmanageable debts on a credit card is undoubtedly bad, sensible and careful use of a credit card can have a number of benefits. Instead of demonising them, it’s more realistic to think of them as a financial product with a range of potential pros and cons.
The pros of credit cards
- Getting a credit card and managing it sensibly can improve your credit score. In turn, this can make it easier to get better rates on other borrowing such as mortgages and loans.
- If you’re spending over £100 on a credit card your purchase is automatically insured by the card company under Section 75 of the Consumer Credit Act. You can get your money back via the card company even if a retailer is dishonest or goes bust.
- Some credit cards will pay you cashback, or give you other perks such as shopping vouchers or Avios points. It’s only worth getting one of this type if you’re going to pay it off in full every month, otherwise the interest charges will wipe out the benefits.
- Credit cards can be useful when you’re travelling, especially if you pick one that’s designed for this purpose and has favourable rates and low or no fees.
- They’re also handy for the very occasional short-term financial emergency when you need a small amount of money quickly but will be able to pay it back in the next month or so.
The cons of credit cards
- Mismanagement can lead to serious debts, fraud and other problems. But you knew that already, right?
Avoiding credit card debt
- Don’t put things on your credit card if you don’t know how and when you’re going to be able to pay it off.
- Ideally, pay off your credit card balance in full every single month. Make sure you know how many days you have after a purchase before the card company starts charging interest.
- Always, always avoid missing your monthly credit card repayments as this can harm your credit score and lead to extra charges and fees being applied to your account. Set up a payment from your current account every month to pay the minimum balance, so you never get caught out.
- If you’ve overspent on a card, stop spending on it immediately wherever possible. Cut it up, and also remember to delete any stored details that you might have left with online retailers or service providers, so temptation cannot strike.
- Reduce the pressure on your finances by transferring the balance of a high interest card onto a low interest card, or a card with a zero interest period. Don’t forget to take any balance transfer fees into account, and ideally keep these as low as possible. Make a plan for how you’re going to pay off the money each month, and stick to it.
- If you’re still struggling with repayments after this, contact a debt help charity such as StepChange. They can help you write to your creditors and perhaps reduce your monthly repayments.
- You could also consider getting a prepaid card instead of a standard credit card, so that it’s impossible to run up a debt on it. One the balance is gone, you can’t spend more. Some types of prepaid card can even improve your credit rating.