Credit Card – Why get one and how to use it

Credit Card

In a nutshell:

Credit cards help to build your credit score, helping you get lower interest rates in the future – as well as many other benefits. Make sure you pay off your card in full each month, and only spend what you can afford.

Key points:

  • There are many myths when it comes to credit cards
  • Building credit score can help you get a lower interest rate in the future
  • Make sure you pay off your card in full each month
  • If you think you will overspend, and would be tempted by ‘free’ money on credit – please don’t get a credit card

Contents:

  1. Introduction
  2. Credit Card Myths
  3. Why you should have a Credit Card
  4. How to use a Credit Card

Introduction

Credit card companies expect the majority of people to overspend, not pay off their credit card, and owe them money – this is how they make their money. However, a credit card has many benefits and can help you out greatly in all areas of life – free flights, better interest rates, purchase protection.

In this post we’re going to be debunking credit card myths and telling you why you should have a credit card, and how to use one.

But, firstly, some key credit card phrases in layman’s terms:

Buying something on credit – means you are buying something using ‘borrowed money’ or money you don’t have.

Credit score – how ‘responsible’ you are with money. The higher your credit score is, the better. You build your credit score up over time as you consistently pay off your credit card each month.

Credit limit – how much money you can spend each month. You will usually start at a low amount, but after around 6 months you are able to request a credit limit increase.

Utilisation rate – how much you use of the credit available to you each month. If you have £300 available and spend £30, your utilisation rate is 10%. If possible, try to keep this as low as possible, as you’ll be a ‘smaller risk’, rather than spending 100% of your credit each month.

Credit Card Myths

There are many myths when it comes to credit cards. These are a few of the most common:

Having a credit card is bad – a credit card can be very useful, if used properly. It is only bad if you misuse it, buying things you wouldn’t otherwise buy, going over your credit limit, not paying your credit card off in time.

Having too many credit cards will affect your credit score – the reverse is true. The more lines of credit you have, the better you are with money, and the better your credit score will be.

Checking your credit score is bad – missing a payment WILL affect your credit score, checking your credit score WON’T. 

You should close a credit card when you get a new credit card – do not do this, as you will lose your old credit history (which is hopefully good history).

Why you should have a Credit Card

You have likely heard that credit cards are bad and will ruin your life… and they could. BUT, if you are sensible, they will actually benefit your life greatly.

Build credit score – This is an obvious point but still worth remembering. The earlier you start building your score, the better.

£0 annual fee credit cards – Whilst some credit cards have annual fees, you are also able to get credit cards with a £0 annual fee, so why would you not want to sign up for one? It is recommended to first start with a secured credit card, and there are plenty with a £0 annual fee.

Get lower interest rates in the future – for 99% of people, at some point in their life, they will want to take out a mortgage. If you can show the bank you have had a credit card for X amount of years, never missed a payment, and always been responsible, you are likely to get the lowest interest rate available to you. Unfortunately, a bad credit score will do the exact opposite, but worse – so you need to make sure you always pay off your credit card in full each month.

Benefits such as cash back and air miles – These are two of the most favoured rewards. You can get cash back by spending money – crazy right? Also, you can get points that can be used for flights, hotels, and so on.

There are a number of other benefits, including: cheaper spending abroad, more protection when buying products, last resort in an emergency, and so on.

But…

If you are a bad spender, then it may be best to consider not getting one, even after listing all of these benefits, Being debt-free, and happy, is more important than getting some cashback, or getting a lower interest rate. Try to look at yourself, and if you know you’re likely to abuse the credit available to you then please don’t get a credit card – as it will cause more harm than good!

How to use a Credit Card

PAY OFF YOUR CARD IN FULL EVERY MONTH!

This point cannot be overstated. The reason why people don’t like credit cards, and you hear horror stories of people owing thousands, is because they don’t pay off their card and the interest can mount up quick.

Only spend what you can afford – Treat your credit card like a debit card. Try your best to use it for purchases that you are making anyway.

For example: food shop, petrol, birthday present. People often get a credit card and then start buying items that are expensive and they do not need, and would not have bought on a debit card – just because you haven’t got to pay for them in cash now, and can use credit, does not mean you should be spending money you don’t have.

Set up a direct debit every month to automatically pay off your credit card in full each month. This is vital so you don’t chance missing a payment, owing interest, and affecting your credit score negatively.

Try to have a low utilisation rate if possible. If you are only using 10% of the credit available to you, you will be seen more as a ‘low risk’ individual. Maintaining a low utilisation rate will also help in getting credit card limit increases.

Above all – Be responsible and sensible. Whilst it is only a card, and some people are very against credit cards – which is fine, there can be very negative effects if you misuse your credit card. But, if you use your credit card properly, you will receive many benefits throughout your lifetime!

These are the basics of credit cards.

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