Credit cards are a convenient method to pay for large purchases over time and often provide valuable rewards, but they also come with some downsides.
You should give some thought to your future credit card use before applying for one. Here are some things to keep in mind as you begin your search.
Find out whether a credit card is a good fit by reading our in-depth advice.
11 Credit Card Advantages
The advantages of using a credit card include:
1. It's safer to use a credit card than to carry cash.
While the odds of recovering stolen or lost funds (Savings Apps) are slim, cancelling a credit card takes just a few minutes. If your card is lost or stolen, or if you believe your account has been used for fraudulent purposes, most financial institutions have safeguards in place to protect you.
If you find yourself in any of these scenarios, you should immediately call your bank to report the problem.
2. Our culture is moving away from a reliance on cash.
At this moment in time, plastic cards are becoming more popular than cash for making purchases. Many shops now take credit cards other than Visa and MasterCard, and some have even stopped taking cash entirely.
3. You could get a use period without paying interest on your loan.
Depending on the credit card, there may be a grace period during which interest (APR) won't be charged on purchases if the amount is paid in full before the end of the billing cycle.
Because of this, using a credit card may be preferable than making frequent overdraft withdrawals. However, there are speciality credit cards that go even further, enabling you to stretch the expense of big purchases over a longer period of time at 0% interest.
4. Using a credit card responsibly may help your score.
A significant portion of your credit score is based on the specifics of your credit card accounts and your payment history. By maintaining a positive payment history, you may improve your creditworthiness and make it easier to get loans and credit in the future.
5. Spend money, get points in return.
Credit cards with rewards programmes and frequent flyer miles enable cardholders to earn points for everyday expenditures like groceries and gas. You may trade in your points for cash back, gift cards, and flights via the lender's rewards programme.
6. If you are not satisfied with a purchase, you have the right to a refund.
If your item is defective, not as advertised, or does not come and the seller refuses to provide a refund or declares bankruptcy, you have the right to file a chargeback with your credit card company under Section 75 of the Consumer Credit Act, 1974.
7. Get an emergency credit line.
If you don't have enough on hand, or can't get a loan, credit cards might be a useful last resort. Keep in mind that you are responsible for paying back all of your debts.
8. Credit cards often come with perks at no additional cost.
Credit card perks like return protection, purchase protection, and extended warranty insurance may help you save money and feel secure about your purchases. Free flights, access to airline lounges, and drinks at restaurants are just a few of the other perks.
9. You can reduce interest rates and monthly payments by consolidating your loans.
You may consolidate high-interest debt by transferring it to a new credit card account with an introductory 0% APR on balance transfers for a limited time. Interest payments may be reduced or eliminated altogether using this strategy.
It's also important to remember that companies often added a premium to credit card purchases up until very recently. Thankfully, this is no longer permitted, so you won't be hit with any surprise fees while using your credit card.
10. Credit cards may be used with any currency.
You can easily use your Visa or Mastercard credit card to make purchases in a foreign currency, despite the fact that conversion costs may apply. If you do a lot of shopping on foreign websites or have an upcoming trip abroad, you may want to apply for a credit card that doesn't charge you anything extra for buying things from retailers in other countries.
11. A strong level of security.
While it may seem counterintuitive, using a credit card to make a purchase might actually be safer than using alternative payment methods.
This is because using a credit card provides additional security against fraud and other benefits. Credit card companies are on your side if, for instance, you are offered a service that was not as described or a product that fell short of your expectations and you want to dispute the associated charge.
When using a certain credit card, you effectively acquire an extended warranty for free for an additional year, protecting you against a prematurely broken device.
Credit cards provide more security than debit cards since fraudulent charges are covered, but a debit card's funds may be stolen and it may be difficult to obtain them back from the bank.
7 Credit Card Disadvantages
Here are seven drawbacks of using a credit card:
1. Expensive interest payments.
There may be interest fees associated with maintaining a balance from month to month, although this varies with each card. If you only pay the bare minimum each month, you could end up paying hundreds or thousands of dollars more than you otherwise would have
(Popular UK Budgeting Apps). This is because the default interest rates can be extremely high and can change according to the transaction type (transfers or cash advances, for example, often get charged at a higher fee than purchases).
You may waste a lot of money on things like home energy, cellphone contracts, and mortgages if you don't regularly evaluate rates and make switches.
2. Harm to one's credit.
Your future loan applications may be affected by past due credit card payments and other outstanding obligations that are noted on your credit history.
3. Fraud.
It’s important to know that your credit card account can be vulnerable to fraud, despite its robust safety measures. That's because criminals could get your credit card data and use it to make unauthorised purchases. The card might be physically misplaced, or your information could be taken online, both of which are typical occurrences.
Two-thirds of accounts were frozen due to fraud, according to one survey. Keep your card with you at all times and use common sense to avoid identity theft while shopping online. Having an up-to-date mobile operating system and reliable antivirus software are two examples.
Be aware that if you fall victim to credit card fraud, you are only responsible for the first £50 of liability, with many banks not charging that at all if you report the theft to your credit card company immediately so they can cancel the card.
Credit cards are a common target for several types of fraud. Even if you may get your money back if your credit card is used fraudulently, dealing with credit card fraud is still a hassle.
4. Cash advance fees.
Credit card cash withdrawal fees and other “cash equivalent” transaction fees (foreign currency purchases, etc.) are very high fees imposed by financial institutions.
A cash advance charge equal to around 3 per cent of the entire transaction amount is assessed whenever you use a credit card to make a cash withdrawal. Additionally, the initial interest rate is usually between 18% and 22%.
5. Yearly costs.
Even while some credit cards don't charge annual fees, the majority of them do. Depending on the card you choose, the annual fee might range from £25 to several hundred pounds. The yearly charge usually rises in proportion to the number of extra features you want.
Credit cards without an annual fee are an option if you'd rather not pay it, but you should still compare all of the card's other features to choose the best one for your needs.
6. Additional charges might add up rapidly.
You may be subject to late fees, over-the-limit costs, foreign transaction fees, balance transfer fees, and even rewards programme fees, depending on the card you use. Interest may also be added to these costs if you want to carry a debt or don't have access to interest-free days.
Credit cards, crucially, are a “revolving line of credit”. They have no expiration date, therefore in theory they may live forever. A credit card is a long-term financial obligation, so it's smart to conduct some research before applying for one.
7. Spiralling spending habits.
In our opinion, this is credit cards' biggest drawback. Once you have one, you may spend as much as you like, up to your credit limit, regardless of whether or not you really have the funds to do so.
If you just have cash on hand, at least your spending will be limited to what you can afford. A greater credit card limit might tempt cardholders to spend more than they can afford.
To escape this predicament, one must exercise financial discipline and spend money wisely (Wise review); yet, this is easier said than done when one is aware of the availability of opportunities for misuse.
So, if you know you have no self-control and love to spend, spend, spend, you should probably stay away from credit cards lest you wind up with an ever-growing pile of debt.
When Should I Use My Credit Card, and How?
If you want to consolidate your debt fast, make a big one-time purchase, or receive cash back on your regular spending, your options for a credit card may vary.
To get the most out of your card, consider these suggestions:
- In order to keep your finances in order, you should never make a purchase with a credit card that you won't be able to afford to repay in whole and on time. You can avoid going into debt and maintain your credit score in good shape by sticking to a budget.
- In addition to the required minimum payment each month, extra payments towards principal reduction are encouraged. Paying down more than the minimum each month will reduce the total amount of interest you pay. In addition, you won't have to worry about interest or going into debt if you can pay off your bill in full every month.
- Set up a direct debit so that your monthly payments are automatically deducted from an account. Put in the bare minimum each month, but keep in mind that it's typically best to pay off more than the minimum.
- Keep yourself informed: Most service providers provide some kind of online or text-based alert system to let you know when a payment is due or when you're getting close to exceeding your credit limit.
- Get some free stuff: If you have a rewards card, use it to its best potential. If you don't use your card often enough to justify the annual charge, you may be losing money. Use your cash-back credit card for all your regular expenditures, pay off the bill in full every month, and enjoy the benefits as you do so.
- Credit card applications leave a footprint on your credit record, and making too many at once is often seen as a sign of financial trouble. You may improve your chances of approval by applying for credit cards at optimal times and by utilising MoneySuperMarket's credit card eligibility checker to look for card offers without affecting your credit.
Summary…
Should I apply for a credit card?
If you know you can afford the monthly payments on a credit card, it may be an excellent choice. Credit scores benefit from prompt, complete payment of bills, including credit card balances.
Using a credit card responsibly might help you build or improve your credit score.
If you are unsure about your ability to make monthly payments on a credit card, you should not apply for one. If you don't pay your credit card bill on time, it might hurt your credit score and make it tougher to get a loan in the future.
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