Should I get a credit card?
In the UK, households officially spent more than we earned last year. We’re great at spending money we don’t have, and as someone who can be tempted by a Topshop sale or a happy hour, I find the idea of being able to spend away on a credit card and only face the bill at the end of the month slightly dangerous.
However, at some point in the future I’m hoping to buy a house, so I’d like to start building my credit score now to help me get a preferential rate on my mortgage later. Everyone’s different, but I’ve decided using a credit card sensibly is one way for me to do that.
What is a credit card?
Using a credit card is like making payments on a debit card except money only leave your account when you pay your bill at the end of the month, not instantly when you make a purchase. You’re purchasing “on credit”, so you’re borrowing against a line of credit up to an agreed “credit limit”.
If you fully pay off your balance by the due date each month everything should be be hunky dory, especially if you’re using a 0% interest card. However, if you don’t pay off the full balance that is when you can get in trouble, as interest starts building, making it harder to clear your debt. We’ve talked about the major advantages of compound interest – interest on interest – elsewhere on MoneyLens. Well, instead of exponential growth on returns, you risk exponential growth of debt.
Why get a credit card?
As I mentioned before, using a credit card well can help you build a good credit score, but what does that mean? With a high credit score you could have access to financial products, such as loans, at a favourable rate in the future.
Credit cards will also offer an extra level of protection if your product is faulty or the company you got it from goes out of business, for example. This applies under the Consumer Credit Act for purchases over £100 and under £30,000.
Also, with some cards everyday spending can lead to discounts on flights and high street shops.
Different types of credit cards
There are several different types of credit cards and the right one for you will depend on what you are trying to achieve and your eligibility.
0% interest purchase - as the name suggests, these cards don’t charge interest on payments for a certain period.
Balance transfer - these cards are used by people who want to transfer their debts to a new card, perhaps if the 0% period on another one has ended or they’ve spotted a better deal.
Cashback or rewards – a variety of cards offer rewards or discounts for shops or flights if you spend a certain amount of money.
No or low foreign fees – if you are planning to use your card abroad a lot, look for one with no or low overseas fees to avoid being charged huge amounts to access your money.
While there are lots of potential benefits to owning a credit card, it is very easy to get into an unmanageable amount of debt. If you do not pay your bill at the end of the month, interest charged by the bank can cause the balance you owe to spiral quickly.
Paying off only the minimum could be extremely costly, and you shouldn’t take on debts you cannot afford to repay. As a nation, our credit card lending has been growing faster than other loans in the past 6 months, up 9.5%, as people use credit card debt to reach each pay cheque, as discussed in this article. The idea of using a credit card just to get through the month should set alarm bells ringing.
Other things to watch out for are…
0% introductory APR – this is often only for the lucky few who are eligible for the initial period. Make sure you know if this applies to you and when it ends so you aren’t caught out by huge amounts of interest.
Late fees – if you do not pay off your balance in time some issuers will charge you a late fee or even increase your APR.
Inactivity and annual fees – if you do not spend enough some issuers will charge you an annual fee.
Multiple credit card applications – if you apply for several cards and/or are rejected from a card, this could have a negative impact on your credit score - the exact opposite of what we are all trying to achieve! So check before you apply, there are several ways to check your credit score and eligibility for a variety of cards without affecting your credit score.