Policy Planner - Credit cards have become an important part of our financial transactions today. They can help us pay for things when we don’t have money to buy them immediately. They give us the liberty to pay for things later. But is it always a win-win situation for us as far as credit cards are concerned? How do credit cards work? And how do the issuers of credit cards, who pay on our behalf, earn profit from them? Also, what are the things that you should keep in mind while getting a credit card?
Did you know that if used well, #creditcards can make you wealthier instead of getting you into financial debt?
Getting a credit card can be the best thing you do for your financial discipline, provided you do it right. I will also talk about how I manage my finances to give me free #money through credit cards.
What is a credit card?
A credit card is a card that allows you to borrow money to pay for goods and services with the promise that you’ll repay the card provider what you owe at a future date, typically with interest added.
Credit card providers will set a limit on the amount you can borrow and have fixed rules for paying off the debt – normally a minimum amount each month.
You can face high interest rates if you don’t clear your outstanding balance each month. But some cards offer a 0% interest rate in the first months for new customers - to attract new sign-ups.
As well as making purchases, credit cards have other benefits. They can be used to consolidate debts, earn rewards and cashback and even boost your credit rating, which can help with future borrowing.
Credit cards are issued by a bank, building society, or other type of credit lender and typically arrive through the post as plastic cards that fit neatly in your wallet or purse. Increasingly people hold them in ‘digital wallets’ allowing them to be used through their smartphone for payments.
Why should I get a credit card?
Here are some of the advantages of credit cards:
Emergency purchases. Credit cards can be particularly useful if you need to make an unexpected payment and you won’t have the funds until payday. For example, your boiler breaks down in winter and you need to get it fixed immediately. You can put the bill on a credit card and then pay it off later.
Spread the cost of a purchase. Some credit cards have introductory offers where you don’t pay any interest on the amount you borrow for the first few months. This can allow you to make an expensive purchase upfront and then spread the cost of repayment over the following months. It’s important to pay off what you owe on the card by the time the interest-free period ends though. This is because after the 0% introductory offer rate the interest rate will jump up to a much higher standard rate.
Consolidate debt. If you owe money in different places and at high interest rates, it can be easier and cheaper to pay it off with a credit card and then have just one debt to manage. Specialist credit cards called balance transfer cards enable you to move what you owe to a new card with a very low or even 0% interest rate for a period of time – sometimes 12 months or more. There is usually a one-off balance transfer fee. But doing a balance transfer can buy you time to clear the debt without incurring interest.
Protection on payments. Credit cards offer you financial protection on purchases you make between £100 and £30,000 under the Consumer Credit Agreement. The law holds the credit card provider equally liable if anything goes wrong with your purchase. For example, this could include if the supplier of the goods or services goes bust and your goods aren’t delivered. Read more about how this works with our guide to credit card protection.
Earning rewards. Some credit cards allow you to accrue rewards or loyalty points with every purchase. If you clear your balance in full every month, a rewards credit card can be a smart way of making plastic work in your favour.
Building your credit score. If your credit score is low it can be hard to get credit. It may be that you’ve missed repayments in the past or perhaps you’ve never borrowed you have no financial footprint or credit history. A credit builder credit card is a card that lets you borrow small amounts and build up your credit rating over time. Used responsibly, it can help to improve your credit score and get better credit deals in the future.
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