The advantages and disadvantages of credit cards
Use a credit card well and you can borrow for nothing, get extra protection on your purchases and possibly even reward points or cashback when you use your card. But, use a credit card unwisely and you could end up paying lots of interest and racking up a debt you struggle to pay off.
So what are the pros and cons of credit cards?
Quick way to borrow
If you need to buy something expensive that you can’t afford to pay for all at once, a credit card is ideal. If you don’t have the cash to hand – or even in your bank account – you can pay with a credit card and then spread the cost over a number of months.
Credit cards are also an easy and secure way to pay for internet shopping. Plus, they are widely accepted around the world.
You get more protection if you pay with a credit card than if you pay with a debit card, cash or cheque. If you buy something between £100 and £60,260 you will get your money back if it all goes wrong. In other words, if the company goes bust, or your purchase is faulty or doesn’t turn up, you won’t lose out because you can claim the money back from your credit card provider.
You’ll also have protection if your card is used fraudulently as your card provider should refund the money. You won’t get a refund though if your card provider finds that you were negligent so make sure you don’t write your PIN number down anywhere.
Borrow for free
Some credit cards offer 0% periods meaning you can effectively benefit from an interest-free loan. You need to clear your balance before the 0% offer ends though otherwise you’ll be charged interest. The average interest rate is 18% - that’s quite high which is why you should pay your debt off before interest kicks in.
Not everyone needs an extended interest-free period, but even if you pay your credit card bill in full each month, you’ll still ‘borrow for free’. You usually get up to 59 days before your credit card bill needs paying and as long as you pay it in its entirety you won’t be charged interest. This can be a great help in managing your cash flow.
Some cards even offer incentives to spend, such as cashback, loyalty points or Avios air miles, which means you could actually make money from your credit card. These are only worthwhile if you pay your bill in full – otherwise the interest you’ll be charged will be more than the value of the rewards.
Switch your balance
If you owe money on credit
or store cards, taking out a new card could actually be a good option. You'll probably be paying interest rates of at least 18%, but you could cut that to zero by transferring your debt onto a 0% balance transfer card. There will be a transfer fee to pay of around 3%, but it's worth it as it will still be less than the interest you'll be charged if you stick with your existing card.
Pay your debt off before the end of the 0% period though as you will then be charged interest on any debt you still have.
Beware the debt trap
It's important to remember that a credit card is a form of borrowing. You buy now and pay later - and there are risks.
If you don't pay off your balance in full each month, you will start to rack up interest at a relatively high rate. Your debt can therefore quickly spiral out of control, particularly if you pay off only the minimum monthly amount.
You should therefore always try to pay more than the monthly minimum and you should think of your credit card only as a short-term borrowing facility.
The interest rate is not the only cost of a credit card. A fee will be charged if you are late making your monthly payment, or miss it altogether. You'll also pay a penalty if you exceed your credit limit. So make sure you keep track of your spending and always pay your bill on time.
And don't be tempted to withdraw cash on your credit card. Most card firms charge a fee to withdraw cash from an ATM, typically about 2%. You will also start to rack up interest immediately as there is no interest-free period on cash withdrawals.
Pick the right card
Make sure that you pick the right card otherwise you could end up paying more than you need. If you've got an expensive time coming up, maybe you’re moving house or planning a wedding, you should look for a 0% purchase card.
get extra protection on your purchases and possibly even reward points or cashback when you use your card
If you need a new card because you've built up expensive debts on another credit card, it's a 0% balance transfer offer you need.
MoneySupermarket's free independent comparison service can help you to find the right card by quickly comparing hundreds of deals on the market. To find out which cards you'd be accepted for without affecting your credit score, try our quick and easy card search .
We're free, independent and compare all UK credit cards as well as offering exclusive deals you can't get anywhere else.Source: www.moneysupermarket.com