What is a credit card
A credit card will allow you to spend money on ‘credit’, effectively allowing you to borrow on them that has to then be paid back each month. You can spend up to a pre-set credit limit which can vary from a few hundred pounds to thousands. The limit will depend on how confident your credit provider is that you will pay it back based on factors including income, credit score and other debt repayments. All these will determine if you are accepted for a credit card in the first place.
If you borrow money on a credit card, you will be charged a rate of interest that is calculated as an APR (annual percentage rate). However, if you pay off the bill in full by each due date, you won’t pay interest on what you’ve borrowed. If you don’t pay off any outstanding balance in full then interest will be charged, and it’s usually backdated too. So, if you’ve bought something at the start of the month, you’ll be charged a whole month’s interest.
Should I get a credit card
Did you know, that around 60% of people who have a credit card pay off the total balance each month.
Source: UK Cards Association
Before applying for a credit card, there are some important points to consider.
- You’ll have a credit assessment by the card provider when you apply which will include checking your credit reference file. A good rating will improve your chances of a successful application. It could also give you access to the lower interest credit cards and/or promotional offers.
- You need to be at least 18 to apply for a credit card. Some cards will have a minimum age of 21.
- You need to pay off the minimum payments each month, even during an interest-free period. When you have a credit card, set up a Direct Debit for the full balance owed on each due date. This will mean you won’t miss a payment that could result in unwanted charges. Missing payments can damage your credit rating.
Pros of a credit card
- Easy to carry and easy to use. Credit cards are accepted almost anywhere.
- Safer than cash. If your card is lost or stolen, you can immediately have the card cancelled with a quick call to your card provider.
- Buy now and pay later. Credit cards will protect your purchases from £100 up to £30,000 under Section 75 of the Consumer Credit Act. For purchases under £100 you might be covered with the ‘chargeback’ scheme.
- Benefits and freebies. Often, credit cards will offer some kind of rewards, benefits or free products and services.
Cons of a credit card
- Be wary of a debt spiral. Once a payment is missed, interest charges will start to add up. Unless the full balance is paid off by each due date, the spiral of debt can quickly build up if you continue to spend on your card.
- High interest payments. If you don’t clear the balance in full each month, you’ll normally have to pay interest on top of your outstanding balance. Interest payable on credit card balances can be significantly higher than a personal loan.
- Additional fees. On top of interest, you could be penalised with additional fees for exceeding your credit limit or missing payments. There are also fees for withdrawing cash with a credit card. Some cards may have a monthly or annual fee.
