What are the advantages and disadvantages of using a credit card?

What are the advantages and disadvantages of using a credit card?
Stacey Corrin

The advantages and disadvantages of credit cards | CashLady

In 2017 UK consumers and businesses spent a staggering £16.8 billion on credit cards, and their popularity and use is growing, with this figure representing a 6% growth year on year. Undoubtedly credit cards offer many compelling benefits, such as convenience and the ability to make a large purchase, which can be split into small, affordable chunks. Let us take a look at the advantages and disadvantages of credit cards in detail, to help you decide on whether a credit card is the right solution for your financial circumstances.

Advantages and Disadvantages of Credit Cards – The advantages

Credits cards provide for extra peace of mind when travelling

A credit card can be a helpful travel companion – providing peace of mind that you have a line of credit for funds should you encounter an emergency situation.

Find out more about using your credit card abroad.

With certain credit cards, you can build up reward pointsThe advantages and disadvantages of credit cards | CashLady

Many credit cards offer incentives for spending with them, such as air miles, cash back or loyalty points that can be redeemed for products.

Using a credit card provides the ability to rebuild your credit score

When used responsibly, a credit card can be used to rebuild a less than perfect credit history. However, it is vital to note that all repayments must be made on time, and that merely making the minimum repayment may negatively impact your credit score. In order to rebuild your credit score using a credit card, the following steps must be followed (to the letter).

Step one: Check – Do you need a new card?

While there are so-called ‘credit rebuilder’ credit cards, the truth is that you can use any credit card to build and boost your credit history. This type of card is generally labelled with this name as they offer a higher acceptance rate for those with less than perfect credit.

Step two: Rejected? Then stop. Do not apply for any more cards just yet

Applying for card after card can harm your credit score. If you have encountered a rejection you should avoid applying again for at least a month. At this point, you should access a free copy of your credit report (via a tool such as Noddle, ClearScore or Experian) and ensure that there is nothing obvious affecting your chances of approval.

Then, when you do apply again, you should choose a provider that offers an approval tool to assess your chances of being successful (minus the harmful footprint being left on your credit report).

Step three: Once approved, use your card wisely

In order to rebuild your credit, you need to regularly use your credit card and repay the balance each month. You may need to make everyday purchases that you have budgeted for, putting away the cash that you would have used to pay, and in-turn using that cash pot to clear the monthly balance before any interest is applied.

Credit cards can provide extra purchase protection

The advantages and disadvantages of credit cards | CashLady

For purchases on services and goods of a value between £100 and £30,000, your credit card offers an extra layer of purchase protection. Should the retailer/manufacturer/service provider go bust, or refuse to fix a faulty product, you will be entitled to a refund from your credit card issuer, as described under section 75 of the new Consumer Credit Act.

Choosing an interest free balance transfer card can help you overcome credit card debt

Step one: Research the best credit card deals for 0% balance transfersThe advantages and disadvantages of credit cards | CashLady

Consider not only any percentage charge on the balance being transferred, but also how long the interest free period is, and what the charges are once the interest free period comes to an end.

Step two: Find out whether you are likely to be approved

Ideally, you should use an application approval checker prior to forging ahead with an application, as a rejection (and any subsequent rejections) can further dent your credit record.

Step three: Budget to repay the balance

If you know that you are going to be unable to repay the balance at the end of the promotional period, plan ahead in good time so you transfer the balance onto another balance transfer credit card.

Advantages and Disadvantages of Credit Cards – The disadvantages

The advantages and disadvantages of credit cards | CashLady

You may worsen your financial situation

Unless you are a prudent user of credit, a credit card can worsen your financial circumstances. This is especially true when a credit card is regarded as extra spending money and used for impulse purchases, rather than used to reduce interest on an existing credit card debt, or for breaking down the cost of a large, necessary purchase.

Missed repayments can damage your credit history

Should you miss a credit card repayment, a default marker will be left on your credit file, which will only be removed after six years.

Going over your credit limit will incur a significant fee

Spending more than the available credit limit on your credit card may:

  • Cause embarrassment if your card is declined when attempting to pay for goods or services in person
  • Incur significant charges

The advantages and disadvantages of credit cards must always be balanced against each other. For those who use this form of borrowing responsibly, convenience, added purchase protection and a rebuilt credit history are there for the taking. Above all else, however, the wisest move that you can make is understanding your expenditure, your debts and the terms and conditions (in full) of any credit card you apply for.