Credit cards are a popular and useful way to borrow money because they offer quick access to cash, large credit limits, flexible repayments in the form of minimum payments and you don’t have to submit a new application each time you want to borrow.
But just because credit cards are convenient, they shouldn’t be used to purchase just anything. Using credit for emergency purchases or unexpectedly high priority bills could be a responsible way to use credit – as long as you can afford the future repayments. However, using credit for everyday expenses or luxury purposes can land you in debt that you can’t easily get out of. Managing your finances is probably stressful enough without the added pressure of making repayments which were avoidable.
The best way to use any type of credit is for planned and budgeted expenses – like a new washing machine when you’ve already calculated how much you need to repay each month to settle the balance in a reasonable time. However, life isn’t always so straightforward and often we can be hit with surprise expenses at the most inconvenient of times. While it’s usually a good idea to have a rainy day savings fund for financial mishaps, using a low interest rate credit card is another option for managing cashflow shortfall. Because credit cards tend to have credit limits over £1000, they generally cover any emergency payments that may come up – from car repairs to emergency flights for visiting ill family.
As long as you are realistic in your ability to repay the borrowed funds within a few months, you can generally use a credit card for a multitude of purposes. However, we wouldn’t recommend splashing out on luxury purchases or expensive leisure activities just because you have access to the credit. If you use up your credit limit on unnecessary things, you might really struggle financially if you suddenly need to borrow for an essential purpose.
Any purchases that can wait until you next get paid, or until you have saved the funds over the next few paydays, are usually not purchases that should go on a credit card. Credit cards charge interest for your borrowing so waiting an extra few days, weeks or months could save you a fair bit of cash.
You should also avoid using any type of credit if you’re already struggling with your current financial commitments. Unfortunately, borrowing more money is unlikely to improve your situation, and will probably increase your indebtedness until it becomes too much for you to handle. Using a credit card for one or two emergency payments is fine, but if you start to rely on the credit facility to meet your basic monetary needs, you might need to contact a free debt advice charity for help.
Although credit cards shouldn’t really be used for luxury purchases, they do carry additional consumer protections that other payment methods don’t, which can make them a good way to pay for things like holidays or building materials if you’re renovating your house. It’s still important that you save up first to repay the balance as soon as possible, to avoid paying more than you need to in interest, transactions fees and charges.
Credit card spending over £100 is protected by Section 75 of the Consumer Credit Act. This basically means that you can get a refund for any purchase over £100 if something goes wrong, and the retailer is unable to refund you directly. This is often why people use credit cards to pay for expensive things – although they don’t need to borrow the money to finance the purchase, the credit card company and retailer are equally liable for refunding you.
You also don’t need to put the entire cost on your credit card to receive the same protection. For example, if you ordered a new kitchen at £10,000, and placed the deposit of £500 on your credit card, the full £10,000 is covered by Section 75. So, if the trader goes into liquidation and you don’t receive the kitchen you’ve paid £10,000 for, you can claim the full £10k back from your credit card provider – even though you only paid the deposit using the credit card.
Of course, there are different terms and conditions between credit card providers so you should check with your bank directly – some may specify a minimum deposit amount, for example. Keep all your receipts and statements so you can easily back up any potential claims you have to make.
There are also some restrictions that may prevent Section 75 from applying; if you use Google Pay or Apple Pay, the credit card provider may view it as third-party involvement and reject the claim. You have to use the credit card directly with the retailer to be sure the protection applies. There are a few other need-to-knows about Section 75 and nitty-gritty details which you should be aware of if you need to make a claim. However, just being aware of the protections in place by using a credit card – even if just for a deposit – can help you make better financial decisions and protect your money.
Whenever you’re thinking of borrowing money, you should use a credit or loan comparison website to ensure you find a suitable type of credit to suit your needs. While there are plenty of options available, and while credit cards are useful for many reasons, it’s always worth checking across the whole lending market in case there’s a different type of credit which is more appropriate, or more accessible for you.
As well as checking comparison websites, you should also check your upcoming finances to ensure any repayments will be affordable. Loans tend to have set repayment amounts, which can make it easier to budget, but revolving credit tends to only require minimum payments. Although you may only need to make a minimum payment to stay within the terms of your credit agreement, you should always aim to repay the balance in full, or over the next couple of months where possible. And, if the repayments seem uncomfortable on your budget, consider a different type of credit, or where you could make adjustments to accommodate the repayments if the borrowing is unavoidable in the first place.
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