Having a credit card in your wallet is one thing. Getting the most out of that credit card… that can be another thing entirely.
There are a lot of different types of credit cards available — from rewards cards to 0% cards and beyond — and even a single credit card can sport a dizzying array of features. So it’s no wonder that a lot of our readers are curious to know how to best use their credit cards.
Over and above the simple convenience of using a card versus cash, credit cards offer additional consumer protection. Some cards also offer rewards, travel benefits and a cheaper alternative to a personal loan.
So let’s shed some light on this by looking at some ideal times to pull out that credit card.
The most basic credit card advantage: convenience
Since a credit card is a form of debt, it can provide greater convenience than other forms of payment such as cash or debit cards. Paying for a good or service with a credit card means that a debt between the cardholder and the card issuer is created, with the expectation that it’ll be repaid on a monthly basis. Should it not be repaid in full each month, interest is charged on outstanding debt.
Therefore, credit cards allow users to purchase goods and services today, and pay for them at a later date. This may ease pressure on cash flow and increase financial flexibility.
Protection when using a credit card
While carrying a credit card instead of cash may be safer in terms of the potential for loss should a wallet or purse be misplaced, credit cards also offer greater protection than debit cards. Under Section 75 of the Consumer Credit Act, any good or service that costs £100 or more and has been at least partly paid for by a credit card has additional protection.
This means that the credit card issuer is jointly liable with the seller of the good or service should something go wrong with the product or transaction. This may, for example, include a failure for a good to be delivered, a faulty good, or a service not being provided as described. This level of protection is not available with a debit card, so it means that a credit card is very often worth using when the cost of a good or service is £100 or more.
Borrowing on a credit card instead of a personal loan
It’s certainly possible to get a competitive rate on a personal loan in order to buy a new car or make home improvements, especially if you have a great credit score. However, a credit card could offer a less costly means of borrowing. Money transfer credit cards offer a relatively low rate of interest — often 0% for a set time period — and can be paid directly into your bank account.
Although they sometimes charge a fee, money transfer credit cards still may lead to reduced interest payments, as long as the loan is repaid before the end of the 0% interest rate period. Following that period, their interest rate can move significantly higher.
Racking up rewards with a credit card
Many credit cards offer rewards, such as vouchers to spend at specific retailers or cashback. These rewards could allow you to maximise the benefits received on items that you would have purchased anyway, such as petrol and groceries.
That said, rewards and cashback credit cards can often have relatively high interest rates. That means that they may be a better match for those users who typically repay their credit card in full each month. If you end up carrying a balance on a card with a higher interest rate, you can easily wipe out any benefit you’ve gotten from the card’s rewards programme.
Using a credit card while abroad
There are a few options on how to pay while travelling. Cash is obviously one, and it’s often possible to get a competitive foreign exchange rate on cash prior to travelling. But while having some local currency is typically a good idea, cash can be an annoying way to pay while abroad. Not only do you have to worry about conversion rates, but you have to play that game of trying to balance having enough cash in your pocket — to avoid getting caught out when you want to tack just one more espresso onto the bill — and not having too much and having to worry about being in a bad way if someone swipes your wallet.
For that reason, travel credit cards can often be a great travel companion. In my view, they are a lot more convenient than cash. Better still, in many cases, their currency conversion is the same rate as that used by global payments companies such as Mastercard and Visa, which could provide consumers with a better deal than that available from high street foreign exchange companies.
Although travel credit cards generally do not charge foreign exchange fees — which is what makes them great travel cards — it is worth checking this before using them while abroad.
Tips for managing your credit card
While credit cards offer significant consumer protection and are worth using in a variety of scenarios, they can lead to financial difficulties if not managed correctly. Interest payments can soon add up if a credit card balance is not paid in full each month. Therefore, it is worth spending only what you can afford to on a credit card, while also setting up a direct debit to clear your balance each month.
