Credit cards can be an essential tool to help us manage our finances. They provide protection on purchases, can offer rewards and cashback, and, in some cases, allow you to build your credit rating. They can also be a cost-effective way to pay for expensive items upfront, especially if you opt for a card with a 0% interest promotional rate.
You’ll need to take care, of course – if you overspend, you can rack up expensive debt. But, providing it’s used sensibly, a credit card can offer several financial benefits.
Here we explain six perks to taking out a credit card:
1. Free protection when you spend over £100
Anything you buy with a credit card that costs between £100 and £30,000 is protected under Section 75 of the Consumer Credit Act. This means if something goes wrong, your card provider must take the same responsibility as the retailer.
So, if you book a holiday or buy a sofa and the retailer goes bust or the goods turn out to be faulty, you can claim a refund through your card issuer.
You’ll even get the same protection if you pay a deposit on your credit card, so long as the whole purchase costs more than £100 and less than £30,000.
So you could put a deposit of £75 on your card for a new bike and pay the remaining balance of £125 in cash and you’d still be covered for the whole £200 if your bike didn’t show up or was faulty.
2. Spread the cost of big purchases
Some credit cards also allow you to spread the cost of spending interest-free.
These 0% purchase credit cards can offer interest-free deals for two years or more, giving you plenty of time to clear your debt without the interest racking up. Use our Smart Search credit card tool to find the best one for you.
Anything you buy with a credit card that costs between £100 and £30,000 is protected under Section 75 of the Consumer Credit Act.
If you don’t clear your balance before the 0% offer ends, you’ll start paying interest, so it’s best to work out how much you need to pay back each month to ensure you’ve paid off your debt within the 0% term. Set up a direct debit for this amount (or more if you can afford it) so you don’t miss any payments.
Ensure this payment is more than the minimum monthly repayment limit too, otherwise you’ll be charged around £12 for each late payment and it will leave a mark on your credit file.
If you’re unable to clear your balance before the 0% deal ends, switch the remaining debt to a 0% balance transfer card.
3. Pay off debt more cheaply
Balance transfer cards are specifically designed for people who want to transfer debt on an existing card so that they can pay it off more cheaply. Many of these cards offer 0% balance transfer periods of three years or more.
Just be aware that most cards charge a transfer fee so you’ll need to factor this in. If you are confident you can clear your balance in a shorter time, you could consider a card with a shorter interest-free window and a lower fee.
Try to clear the outstanding balance before the 0% offer ends, otherwise you’ll pay a hefty interest rate on any remaining debt.
Our handy credit card calculator will help you work out how long it will take to clear your credit card balance and how much interest you’ll pay.
4. Earn cashback or rewards in return for spending
A cashback or rewards credit card could earn you £100s a year, but only if you’re strict with yourself and remember to clear the balance in full each month.
If you use a rewards or cashback credit card for spending, you’ll be able to earn cashback or collect points which can be spent on flights, high-street retailers and supermarket shopping.
The key is to use these cards for big purchases, as well as everyday spending.
However, be aware that many of these cards charge an annual fee, so factor that in when you’re doing your research. And bear in mind that many cards charge interest from the start, so you’ll need to clear your balance in full each month – otherwise the amount of interest you pay will far outweigh any rewards you earn.
5. Cut the cost of spending on holiday
Using a standard credit card when you go abroad can be expensive as many charge fees for foreign transactions.
However, there are a number of credit cards designed specifically for using overseas that won’t charge you a fee when you spend on them. Many also offer good exchange rates.
Be aware though that even if your card doesn’t charge you a fee for cash withdrawals overseas, most cards will still charge interest – and this will be charged from the moment you withdraw your money. So it’s best to avoid using your credit card at an ATM.
Also bear in mind the best cards are reserved for those with excellent credit scores. Our Smart Search tool will help you find out which card you’re most likely to get accepted for.
6. Improve your credit rating
If you have a poor credit rating, you won’t qualify for the best deals, but you shouldn’t also assume you won’t be able to apply for any credit card at all.
In fact, some providers offer cards that can actually help you improve your credit rating. You are usually offered a low initial credit limit, but once you have demonstrated you can use the card responsibly and make regular monthly payments, this limit will increase.
However, bear in mind that cards for those with a poor credit history usually have much higher annual percentage rates (APRs) than cards for those with higher credit scores, because these borrowers are considered a higher risk. So always try to pay off what you owe in full each month.