Thinking about getting a credit card? Or wondering how to get the most out of an existing card? With there being such a wide range of credit cards available that serve different needs, it is important to work out which one is right for your personal circumstances. Read on to find out more.
What are credit cards?
Credit cards are a means of paying for goods and services through a loan issued by the credit card company. The credit card issuer provides cardholders with a credit limit that can be spent on any goods or services. The debt is repayable on a monthly basis.
Should a cardholder fail to repay in full any amount borrowed on a credit card when it is due, interest will be charged. (Since credit card debt is not secured against any specific assets, the interest rates charged can be higher than for other types of debt such as a mortgage.)
How are credit cards obtained?
Obtaining a credit card can be straightforward and fast, depending on your credit score. A credit score is a figure that lenders put together based on a variety of elements, such as your track record of repaying debt and current levels of outstanding debt. Consumers who have a good track record of repaying debt may be accepted for a credit card online in a matter of minutes.
Many credit card companies provide eligibility checkers, which can be a useful means of ascertaining your chances of being accepted for a particular card. Eligibility checkers do not have an impact on your credit score, which can be negatively affected if you conduct several applications for credit cards in a short space of time.
In terms of finding the right card, comparison sites such as MyWalletHero offer guidance on the pros and cons of a wide range of credit cards. They may make it easier to find the right card for your own circumstances, with it being possible to apply online in most cases.
When applying online, details such as your address history, employment situation and income may be required. For many credit cards, online applications can be completed within a matter of minutes, with a decision often provided shortly thereafter.
Types of credit card
A variety of credit cards are available that may be suitable depending on your personal circumstances.
- Balance transfer credit cards allow you to transfer existing debt from a credit card to a new card with a period during which a relatively low interest rate is charged. This could cut your interest payments and lead to debt being repaid quicker than it otherwise would have been.
- Purchases credit cards offer an introductory 0% interest rate on new purchases within a set period after account opening. They may be useful for consumers who have a large purchase coming up in the near future.
- Rewards credit cards provide incentives to use the card, such as vouchers for specific retailers or cashback. Although they may offer higher interest rates than other credit cards, rewards cards could be useful for the 60% of credit card holders who repay their balance in full each month.
- Travel credit cards offer either low or no foreign transaction fees. They are therefore useful when used abroad or for making purchases from retailers in non-UK countries. Over the long run, consumers can save significant sums of money by using a travel credit card, due to the cards’ lack of a non-sterling transaction fee, which, for other cards, is often around 3%.
- Money transfer credit cards can be used to repay existing non-credit-card debt, with them offering a low interest rate for a set period. This could help you to reduce interest payments on existing debt and pay back an existing loan faster.
Protection offered by credit cards
Credit cards offer two types of protection: chargeback and Section 75 protection.
As with a debit card, credit cards offer a chargeback facility. Chargeback is useful when goods or services have not been provided as expected. In this scenario, the credit card issuer may seek to reclaim the cost of the purchase from the supplier’s bank.
Unlike debit cards, credit cards also offer Section 75 protection. This is for any item or service that costs £100 or more, and where at least part of its cost is paid for using a credit card. Unlike chargeback, Section 75 is a legal protection. The card issuer is jointly liable with the retailer in case something goes wrong with a purchase; this could be a faulty item or a failure to deliver it, for example. As such, using a credit card instead of a debit card for any goods or services over £100 is worthwhile.
Tips when using a credit card
In order to avoid paying interest on credit card debt, it is a good idea to repay your balance each month in full. Setting up a direct debit for payday could be a good idea to achieve this; since the money will leave your bank account, and there will be less temptation to spend.
It may also be worth having more than one credit card, depending on your personal circumstances. For example, you may with to have a rewards card and a travel credit card, in order to save money on foreign transaction fees while also maximising your benefits when shopping in the UK.
Takeaway
Credit cards can provide flexibility and added protection for consumers. However, credit card holders may incur high interest charges if they don’t manage their cards correctly. It is important to find the right card for your circumstances and ensure you stay on top of any credit card balances that you generate.
