Guide to Credit Cards and Their Use
Credit cards are used the world over, making lenders a huge amount of money. They are a source of huge use for some people and a source of huge stress for others.
Some people find them easy to manage, maintaining a zero balance throughout and gaining bonuses and perks as they use them. Others max them out quickly, gaining regular amounts of interest and they become a millstone around their necks, costing them a lot of money to just keep going.
This guide is designed to be a simple way to find out more about credit cards, using them, benefits, warnings and interest rates.
- Warranties – Purchase Protection
- Credit Scores
- Balance Card Transfers
- How to use cards effectively
- Interest Rates
- Credit cards for low credit
One of the biggest reasons to shop around when it comes to credit cards is that they can offer rewards for doing so. These can vary, so it’s worth doing your research. Some famously offer air miles, allowing you to earn money off international travel. Others offer vouchers, which can be redeemed for high street shops, cinemas or restaurants.
Sometimes, cards run special promotions as well, such as ‘Shop Local’ – a week through the year where you can earn extra bonuses for using your credit card in smaller, local shops that are signed up to the scheme.
That said, not all the reward schemes are as simple as they may appear at first glance.
Cashback can be a hugely useful reward for many when it comes to using credit cards. The basic way it works is that you earn a certain amount of cash for purchases that you make using the credit card, as long as you pay off the entire amount owed on the card on a monthly basis.
Depending on the provider, this can either be done on an annual basis (this is sometimes referred to as a Statement Return), a monthly basis (to coincide with your monthly statements) or on a per-purchase basis (where you earn cash back every time you use your card to purchase something). If you don’t repay the amount owed on the card, then you will usually not earn any cash back that month. Most of the time, if you do earn cashback, it will be electronically deposited to your bank account. If you choose to, and your lender has the option, you may be able to redeem these points in the form of vouchers. These may not be at quite as good a rate as straight cash back, but can be a way of making sure that you’re actually earning rewards and not just ploughing the reward money back into your own finances. The reason they may not be as good a rate is that vouchers can form an exchange, so you effectively buy them at a little more than the amount of the voucher – however, some providers may do them at face value or even lower.
This doesn’t mean that you can do this without limits, of course. After all, reward schemes can be abused at times. But they can also not be as strong as they may appear. A lot of companies have limits on the amounts of rewards that you can actually receive. This may be generous or, as with some companies, it may be stingy. Some can appear like they give a great rate of cashback, but they’ll limit the amount you can earn to quite a low amount, so you may actually get a better deal by going for a lower reward rate with a higher limit.
Some schemes, including those linked with supermarkets, involve gaining points on your card rather than cash back. This can then be used towards your weekly shopping or whatever else you wish. However, it may be worth checking just how much these points are actually worth. They can sometimes be worth a very small amount indeed – even fractions of a penny. This does not mean that this is a bad promotion; purely that it may not be quite as good as it appears. As long as you know what you are earning in real terms, points can be a useful way to gain money on your card.
Sometimes more difficult to claim
Bear in mind that not every scheme gains you cashback with every retailer. It may be that some of them only gain you points if you use specific retailers (or give you a bonus if you use those retailers). It may be worth doing some checking online to see if there are any restrictions on where you buy. If there is, it’s worth checking the prices of your purchases there as opposed to elsewhere. There are some circumstances where you may buy from a specific retailer in order to get the reward, but you would have saved more than the reward by going with a different retailer. It also may be worth checking the figures once you’ve received the cash back. There are some incidents where purchases have failed to be picked up by the cash back scheme – this can usually be queried if you believe something has been missed off. Most of the time, it’s fine, but as with anything involving multiple transactions, mistakes can occasionally happen.
If you travel a lot, then air miles may be the most useful potential perk for you. Not all cards offer them, but some do. Basically, the way they work is that you build up an effective number of miles while making purchases on your card, so that this can be used towards discounts on flights or (if you have enough points) can even mean free flights. Some airlines will give you more for your air miles than others. This can vary from anything between a mile per pound spent through to four and a half miles per pound spent.
Warranties – Purchase protection
This can be one of the most compelling reasons to use credit cards at all. If there are problems with your purchase, or if there are problems with the company, you may have more protection by using your credit card. Effectively, they will cover your purchases if they are lost or stolen within a certain amount of time, and arranging for this to go through can be a lot more simple than going through the bank themselves or by going through your insurance. You can easily find out if your credit card offers purchase protection by checking with them – or if you’re pricing up various options, you can usually find the information on their website.
As strange as it may seem, if you’ve managed to go without debt your entire life, this may actually count against you when it comes to your credit score. This is because a lot of lenders are actually looking for proof that you can use (and repay) credit. If you’ve not had to use credit, that can actually count against you – after all, if you have no record of using credit, how can there be proof that you can do so well? Because of this, credit cards can actually be a way to gain some credit history. If you’re good at using them (see below for more on how to use credit cards well), then you can do so in a way that gains you cash back or bonuses as well. Credit scores don’t change quickly, which is worth bearing in mind. It can take a good few months to begin to gain a proper credit history. However, using a credit card regularly without getting into debt can be a way to build in a fairly risk-free way.
Balance card transfers
If you have a decent credit rating, there are few reasons for you not to be able to be on the best possible rate for credit cards. A lot of companies are looking to gain new customers, especially those who have used credit cards for some time. As a result, a lot of credit cards offer balance transfers, often at attractive introductory rates. This allows you to take the balance on one credit card and transfer it across to another credit card with a more attractive rate. Many offers have a period of time at 0% interest, so if you are looking for a break from paying interest while you repay the balance on the card, this may be an option to look seriously into. It is worth repeating that this is something that you will likely only be able to do if you have a decent credit rating, as other companies may not be willing to take you on if not. Also, due to a large number of people jumping from card to card over time, constantly taking advantage of low interest numbers, doing this too often can actually make it less likely you’ll be approved as well. This is because the credit card companies are looking to make money as well – introductory offers are designed with the intention that you’ll actually use the normal rate afterwards. Not doing so repeatedly could make other lenders wary of you doing the same thing to them.
How to use cards effectively
Ideally, the best way to use credit cards is to avoid treating them like they’re loans. If you have an outstanding balance on your credit card, then you won’t gain any bonuses and the loan will cost you more money. If you carry on having your card balance in negative, you will be charged on it each month. You will also have to pay (at the very least) the minimum payment that the card provider agrees. This is usually enough to cover the interest earned on the card, but the two can easily cancel each other out. If this happens, you are simply paying to keep your debt alive rather than actually paying off any of the main balance of the card. It is generally better to avoid getting that level of balance on your card, if possible. While it can be very tempting to use your card as, effectively, a debit card, the longer you maintain a negative balance on your credit card, the more it will cost you. This can end up being significantly more expensive than most loans in the long run. The best way to pay off your credit card is to set up a direct debit to pay off the entire balance each month and restrict your usage of it to essentials or things you would use your debit card to pay for otherwise. You may not be able to automatically set up your direct debit with the provider to pay off the entire amount, as some of them default to paying off the minimum only – however, you should be able to arrange this by contacting them and requesting they set it up. Alternatively, if they send you an agreement which does not feature the option, just write it on the direct debit mandate yourself. Then call them to make sure they’ve accepted it. It may seem rather counter-intuitive advice, if you’re looking at credit cards as debt, but the best way to use them tends to be to use them to buy a lot of the things you would be buying within your budget anyway. Then, repay it completely, so you don’t get any interest charges, but you do get the positive elements.
Credit card rates do vary between providers, so it’s always worth checking comparison sites before agreeing to terms with a provider. Also, many providers offer introductory rates – however, as with any introductory rate, it’s important to take a look at the long term rate as well. You may make a saving in the short-term, but end up spending more and/or earning less than you would with another card. Providers can also change card rates, although they will give you some notice if they are going to do this. They can also change your limit, which is something they can do with a fairly small amount of notice.
Credit cards for low credit
Generally speaking with interest rates, the better your credit history, the better the rate you will be able to get on credit cards. This isn’t a hard and fast rule, but it’s a reasonably fair generalisation. One thing that is also generally true is that the worse your credit rating, the more difficult you will find it to get a credit card with an attractive interest rate. However, credit cards do exist aimed at people with worse credit histories. Some of them don’t even involve credit searches. One of the main reasons to use these is to improve your credit history. They don’t tend to have perks and bonuses, but do tend to come with significantly higher interest rates. They can be used positively, though, by avoiding using them as debt products and using them instead (as above) as a way to spend normally and then pay off completely. One of the best ways to improve your credit rating (along with paying off debt) is to actually use credit well. If you use a credit card for low credit in an appropriate way, you won’t need to pay any interest and you’ll be putting good credit behaviour on your credit history. At the same time, if you take it out and go straight into negative balance and stay there, they can become a rather expensive way to borrow. As a source of debt, they may be difficult, but they can be useful as part of an overall plan to improve your credit profile.