Credit cards are one of the most common ways for people to borrow money in the UK. They allow for accessible and simple borrowing for most people, and the minimum payment requirement means you don’t have to stretch yourself beyond your means to repay the credit. While there are some 0% interest rate credit cards available, the average APR on a credit card in the UK is around 22.5%. For people trying to repair their credit history, higher interest rate credit cards might be the only option available, but they can still be cheaper than other borrowing options for bad credit.
Of course, like any credit facility, credit cards are most effective when used sensibly and to assist with occasional expenses, not everyday living. In some cases, people may use credit cards for their monthly expenditure and repay the full balance at the end of the month – there can be benefits of doing this, including cashback, points or money-off vouchers. However, it’s important that you don’t borrow to supplement your income, as this can lead to over-indebtedness.
Credit can be a difficult thing to navigate, but good money management is important for your financial wellbeing and day to day life.
There are a few things you need to know about credit cards so that you can use them most effectively.
Interest on a credit card doesn’t always accumulate in the same way as a fixed loan. Often, if you repay the balance in full at the end of your statement period, you won’t have to repay any interest on your borrowing. If you don’t repay the balance in full, the interest typically accrues on the amount you’ve borrowed, which is why you should always aim to repay as much of the balance as possible – even if you’re only required to make a minimum payment.
Only paying the minimum payment on a credit card can cost you money in the long run. While a great temporary financial respite, you shouldn’t rely on minimum payments or only factor the small amount into your monthly budget. Before making a big purchase on a credit card, create a plan to repay the full balance as soon as you can realistically afford.
All credit cards come with a credit limit and your personal credit limit may be a result of many factors, including credit history, previous credit limits, income and creditworthiness. While you have a maximum amount you can borrow, it doesn’t mean you should max out your card. Having a large balance on your credit card over a long period of time can harm your credit file and reduce the amount creditors are willing to lend in the future.
Credit cards don’t just come with an interest rate. Often, you have transaction fees, ATM fees and missed payment fees too. It’s important to check the fees applicable to your credit card before you submit your application – there might be an alternative credit card available with smaller fees.
While there are many ways to manage a credit card, there are some which are better than others. Credit cards have very strong consumer protections so they’re a good borrowing option if you need to make any large purchases such as a holiday or building materials for an extension. If the holiday is cancelled or the products don’t turn up, your credit card should be able to refund you the money if the supplier can’t.
Some credit card providers also offer rewards to keep their customers. These can include cashback on certain purchases, money off vouchers for an associated shop or even loyalty points to use against flights. If you manage your money well and have a sustainable budget, then using your credit card for your usual monthly expenditure can increase the rewards you get from your bank and therefore be a sensible way to use your credit card. However, you have to be careful with how you spend the credit as you don’t want to be unpleasantly surprised at the end of the month by a larger-than-expected credit card bill. Using a credit card for your monthly outgoings is only a good idea if you can assuredly repay the balance in full at the end of your statement period. It’s also worth noting that you should try not to reach your credit limit each month so the above may only work if you have a large credit limit or a relatively small monthly expenditure.
Using credit can also help to build your credit score. Even if you don’t need to borrow any money, putting small regular payments on your credit card and repaying the balance in full at the end of each month can help improve your credit file. If you subscribe to a streaming network or have a small phone bill around £10 per month, these can be good payments to put on your credit card as long as you have your automatic payments set to ‘full balance’. This way, you can’t miss your repayments as long as you’ve got the money in your bank account. It will take a while to build your credit score but these little steps that demonstrate your creditworthiness can mean you’re in a much stronger position to apply for a mortgage, for example, in the future.
The 4 need-to-knows above are a good place to start if you want to compare credit cards, but a comparison site is also a good idea as they’ll collate most of the information for you. Some sites will even project whether you’d be accepted or not.
Of course, credit cards are a revolving credit facility which means you have continuous access to the credit available (unless the contract is terminated by either you or the card provider). While it can be handy to have readily available credit for emergencies, if you’re prone to spend outside your means or you’re still working on your money management, then constant access to credit can be a burden. If you’re looking to compare the market loans are another option to consider. Most loan products – from payday loans to bank loans – have one application, one loan transfer and then your repayments (over months or years, depending on the product). As long as you can afford the repayments, a loan can be a sensible option as the credit available is finite and you can’t simply tap the money away using contactless.
All you need to know about short term loans
The best saving tips, budget ideas and ways to improve your financial health