Credit cards are essential for building up your credit score, making you look more favourable to lenders, and helping you to gain a mortgage or loans for significant purchases in your future. However, credit cards must be approached with some caution. With debt traps and monthly repayments to manage, some people are left considering, should I get a credit card?
What Are Credit Cards?
Credit cards vary from debit cards as they give you access to a defined limit of money that you do not have to have upfront. This limit is determined by the credit card provider and it allows you to make purchases, just as you would with your debit account. What this means is each month you are borrowing money from your provider, which you have agreed to pay back using your bank account the following month.
The ideal situation with a credit card is that each month you pay off your credit card balance in full and by the deadline. If you take this approach, you will avoid paying any additional interest or late fees, rolling over your total to the following month.
Unfortunately, for some months this is not possible. When this happens, you must meet the minimum amount outlined by your provider. Doing so will stop you from incurring any missed payment fees and seeing your credit score negatively affected. If you keep a close eye on your monthly repayments and only spend within your limit, having a credit card can be extremely beneficial.
Why Should You Get A Credit Card?
As we have already mentioned, credit cards are the most efficient way to improve your credit score. Your credit score is a three-digit figure that rates how reliable you are to lenders. All lenders rely on this figure to assess how dependable you are and how well you can handle borrowing and repayments, based on your track record.
If you have a favourable, high credit score, you will likely receive better deals on credit cards, as well as mortgages and loans. For those who are looking to obtain their first credit card or who are looking to improve a bad credit score, there are credit builder credit cards available. Until you have a proven record of successfully managing repayments, you are unlikely to receive a low APR credit card.
Furthermore, credit cards allow you to make purchases before your money has entered your bank account. For example, if you are waiting for payday, there is no need to wait to make a necessary purchase, especially in emergency circumstances. Having access to this pot of potential capital provides you with a financial buffer, allowing some breathing room when you desperately need to replace a boiler. And, as long as you meet the next monthly repayment, you can effectively stall the economic effect on your bank account without paying any interest.
The Pros of Opening a Credit Card
There are many positives to owning a credit card, both for your financial image to other banks and lenders, but also for your own personal gain. With a credit card agreed by a provider, you can access the following:
Section 75 Protection
If you need to make high-value purchases over £100, you have probably heard that it is better to make this payment on a credit card. The main reason behind this is that, unlike debit cards, credit cards come with additional protection for the consumer.
For purchases of goods or services between £100 and £30,000, credit cards offer security under Section 75 of the Consumer Credit Act. This protection, if your goods are faulty or fail to arrive, states that both the retailer and the credit card company are equally liable to refund you. This also includes scenarios when the retailer or supplier goes bust. Therefore, making this payment on a credit card guarantees you a full refund under these circumstances.
In addition, for purchases under £100, you are still protected under the chargeback system.
Lost Wallet/Purse Protection
If you ever discover that you have lost your purse or wallet full of money, it is unlikely it will find its way back to you. But, if you happen to be a victim of card fraud, your credit card comes with legal protection. Your credit card provider is required to refund you any payments that have been deemed fraudulent. The only exception is if there is evidence stating otherwise.
Cashback and Rewards
Most credit cards have additional incentives that encourage you to make more payments, a common method is by offering cashback or rewards. If you spend money at certain retailers, you may be eligible to receive a certain percentage of your purchase back simply by using a credit card. Similarly, other cards offer points for each purchase that can be traded in for shopping vouchers and other gifts, such as theatre and concert tickets, or access to airport lounges.
Cheaper Purchasing Aboard
Some credit cards, depending on your provider, offer improved exchange rates for international purchases or lower fees when using your credit card to purchase abroad. Other credit cards will have a 3% charge free, so it is worth exploring the small print if this is a beneficial feature for you.
The Cons: What You Risk When You Open A Credit Card
Credit cards are serious financial commitments and there are risks attributed to them. The most obvious negative with a credit card is their ability to make your financial situation worse if you lose control.
When you miss your monthly repayments and begin battling with interest rates and missed fees, it is easy to spiral out of control. This situation tends to present itself when credit cards offer too many incentives to increase your spending. But, if you are able to remain disciplined when you use your credit card, you should always remain within your limits.
Another credit card trap is the introductory 0% APR rate. Borrowers often get enticed in by the initial interest-free payments they can make, only to get tripped up later on when this APR value drastically increases. However, if you enter a credit card agreement with open eyes to these risks, you should be able to put the necessary measures in place to stay on top of your repayments.
Understanding The Annual Percentage Rate (APR)
The most important thing to keep your eye on when exploring your credit card options is the annual percentage rate (APR). The APR indicated the total cost of credit annually, this is including any interest rates and additional fees.
When Should You Avoid Arranging A Credit Card?
While credit cards do have their benefits, there are a couple of instances whereby a credit card may cause you more harm than good.
Does the idea of owing money back to the credit card provider each month concern you? If so, then it may be best to explore another option. In instances where you cannot afford your credit card balance, let alone the minimum repayment, it is easy to spiral into debt. It simply is not worth taking on the risk of putting yourself into financial difficulties.
Moreover, if you deal with a lot of transactions and payments in cash, a credit card may not be for you. Credit cards often come with additional fees when you start withdrawing amounts from a cash machine. With interest to pay as well, this makes having a credit card more expensive.
The Different Types of Credit Cards
In the same way, you need to assess and choose your credit card provider, you will always need to decide which type of credit card you want to apply for. Four common types of cards include:
- Balance Transfer Cards – These credit cards allow you to transfer a pre-existing balance from another credit card onto a new one, giving you the benefit of 0% interest for a fixed period.
- 0% Purchase Cards – For a fixed period, you can benefit from a 0% interest rate on purchases.
- Reward Cards – Making purchases on this card will allow you to gain shopping vouchers, air miles, discounted flights and holidays, points towards retailers and even cashback.
- Credit Builder Cards – If you are yet to start building your credit score, or have a poor credit rating, these credit cards are designed with you in mind. However, they will often come with a hefty interest rate.
Am I Eligible For A Credit Card?
It is advisable to look into your eligibility before you begin applying for credit cards, as unsuccessful attempts can be damaging to your credit score. In most cases, it could be your current credit score letting you down. It is recommended to start improving your resting if you’re concerned about your score.
Before approving an application, a credit card provider will look into your financial behaviour to get an idea of your spending habits. If you are thinking of applying to a provider, there are some things to do before you submit:
- Keep within your limits – if you have additional credit cards or loans where you are close to your balance limit, it gives off a better image to a provider to reduce the amounts across all.
- Meet your current repayments – no lender wants to give money to a borrower who poses uncertainty on whether they will be able to meet their repayment terms. All providers will look over your credit history and missed payments never go down well. Do your best to meet and manage all your upcoming repayments to increase your chances.
- Spread out your applications – multiple rejected credit card and loan applications will flag up your credit score and damage your borrowing reputation. Even if you are desperate for credit, take the time to thoroughly improve your credit before applying. Taking the time before applying will only increase your chances of being approved, streamlining the entire process.
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FAQ
What are the risks of a credit card?
The majority of credit cards are unsecured which straightaway increases their risk. If credit card payments are not managed and paid on time, it is easy to rack up a lot of debt. In worst-case scenarios, you can be sued by your credit card provider for not paying back the money you owe.
Credit cards do require discipline and the ability to know when to stop spending. However, with points and rewards on offer, many cards encourage you to spend more than you planned. With creeping credit card bills, it can be extremely stressful to juggle the repayments.
Should I get a credit card at 18?
Getting a credit card comes with a lot of responsibility and is not a decision to take lightly. While it is advisable to get a credit card as early as possible to help build up your credit score, it must be used responsibly. If you cannot keep up or manage your monthly payments, having a credit card can cause a lot of financial difficulties.
How do I choose the right credit card?
With so many credit card options available, your best bet is to explore your options before you apply and check your eligibility. Unfortunately, some eligibility checks can affect your credit score if you are deemed unsuccessful. That is why it is paramount you read the fine print and make sure the card’s features match your needs; for example, some cards are authorised to be used abroad, whereas others offer cashback incentives.
I can’t meet my monthly repayments, what happens now?
Before applying for a credit card, you must be confident in your ability to meet the monthly repayments. Ideally, you will be able to pay more than the monthly minimum repayment. However, if you find yourself in financial difficulties further down the line, there are a few things you can do.
First things first, you can try aiming for the monthly minimum. While it is recommended to pay your credit card bill off each month; if this is not possible, the minimum amount is set at a manageable amount. While it will take you longer to clear your bill, it is better to hit this target and avoid picking up additional late fees.
Another thing you can do to ease the burden of your credit card bill is to switch your balance to a 0% balance transfer card. In essence, you are simply moving your debt across from one card to another; however, this process will buy you some time and avoid hefty interest payments.
The most important thing to do if you cannot meet your monthly repayments is to contact your credit card provider. All providers are required to act sympathetically to their customers, offering solutions such as a payment holiday or restructuring your credit card debt.
What are the alternatives to credit cards?
If you are unsure about the benefits of a credit card, there are a few options you can consider. These include loans, arranging an overdraft, and prepaid cards.
Loans can give you instant access to an agreed amount of money, often more than a credit card will authorise. However, you will agree to fixed and structured repayments often with high-interest rates. Unlike a credit card, loans often come with hidden fees for early repayments so it is best to check the small print.
An arranged overdraft on a debit account is another way to access more capital in the short term. The problem with overdrafts is that when these are continued into the long-term, you will end up paying a lot of money in interest rates and people tend to struggle to get out of the red.
Prepaid cards, therefore, offer an option where there are no monthly repayments and are a popular choice when travelling. The only thing to remember is that when you are abroad there can be additional fees when topping up your card and you must have the capital upfront, in advance.
I already have a debit card, do I also need a credit card?
The main benefit of applying for a credit card is your ability to grow your credit score. While debit cards allow you to manage your income and demonstrate an ability to spend within fixed parameters, especially if you do not have an arranged overdraft, they do not impact your credit score. Without a credit card, it is extremely difficult to improve your score and look favourable to lenders.
In addition to a credit card’s ability to grow your creditworthiness, it also offers added protection on purchases in line with Section 75. Debit cards do have chargeback protection but this is not as comprehensive. Moreover, it is possible to gain rewards and bonuses when you arrange a credit card with certain banks, use your credit card abroad and gain more flexibility in your spending.
Credit cards also help you when you need to make an unforeseen, emergency purchase. In these circumstances, you do not need to have the additional money to make this purchase upfront. Instead, you are able to pay with your credit card, paying the money back at a later date.