If you’re wondering whether a credit card is the right option for you, it might not always be a straightforward decision. They can offer some benefits depending on how you use them, but like any kind of borrowing they also present a risk if you can’t pay back what you owe.
We’ve set out the basic advantages and disadvantages to using credit cards, so you can make an informed decision on whether or not you should apply for one.
Advantages of using a credit card
As long as you use them properly, credit cards can have a number of advantages over debit cards and cash payments. These include:
- Improving your credit score: If you have a poor or limited credit rating, credit builder credit cards can offer a way to improve your financial situation and create better borrowing habits. As they’re aimed at people with a poor credit rating, they can often charge higher rates of interest – but as long as you make your repayments in full each month you won’t have to pay any interest. Consistently paying off your balance means you’ll be able to slowly build up your credit rating as you show that you’re able to borrow money responsibly over a long period
- Buying now to pay later: It can also be a more convenient option to use a credit card, as it can let you buy a product or service but not pay for it until payday rolls around
- Spreading purchases out: If you need make a large purchase, such as a home appliance, a credit card offers the advantage of spreading the cost over several monthly payments
- Having purchase protection: If you buy something on your credit card and something goes wrong – for example if the selling company goes bust or if the purchase is faulty or goes missing – you can claim the cost back from your credit card provider. This is because any purchases you make between £100 and £30,000 on a credit card are protected by Section 75 of the Consumer Credit Act. You’ll also be able to claim for a refund if your credit card is used fraudulently, as long as you weren’t negligent with it – read more with our guide to credit card security
- Interest free spending: If you need to make a purchase but you’ve not saved up enough yet, some credit cards offer a 0% interest period that effectively lets you borrow for free – providing you make your monthly payments. Even if you pay the minimum amount required per month, you’ll still be borrowing interest free until this period ends. At this point it would be best to completely pay off your debt, otherwise you could be placed back on the provider’s standard interest rate – which can be quite high. You might also be placed back on the standard rate if you miss a payment or exceed your credit limit
- Getting cashback, benefits and rewards: If you know you’ll be using the credit card for regular spending, you could take advantage of one with varying rewards and incentives. For example, if you’re a keen shopper you might find a cashback or store credit card to be ideal, while if you’re often flying from country to country you might prefer an airline credit card
- Cutting down your debt: If you have outstanding debts you might consider a balance transfer credit card – you’ll be able to transfer existing debts on to one credit account, usually with lowered or no interest. This means you reduce the amount of money you pay on interest, letting you pay off the debt quicker.
Disadvantages of using a credit card
When you use a credit card you should be mindful of the following risks:
- The possibility of debt: The main risk of taking out a credit card is that you could put yourself in rising debt if you aren’t able to pay back what you borrow. Credit card providers can charge high rates of interest because you have a poor or limited credit history (as you’ll present a higher risk), or because the card offers certain extra features. Sometimes the interest rate can be over 20%, which builds up quickly if you don’t pay the balance off
- Your credit score: Letting your credit card debt build up, or missing payments, can influence your credit rating. The lower your credit rating the harder it will be to apply for credit in the future
- Fees and charges: Credit cards can also come with fees and charges if you don’t meet your repayments or you exceed your credit limit
- Limited usage: You might be restricted in how and where you can use your credit card. For example, many will charge you for withdrawing cash or using the card abroad unless stated otherwise in the credit agreement
How can I use my credit card effectively?
To make sure you’re getting the best from your credit card, consider the following:
- Get a card to match your needs: You should consider what you’ll be using your credit card for before applying. There won’t be much point in paying extra for an airmiles credit card if you don’t fly a lot, and if you’re in a lot of debt it’s worth considering balance transfer cards more than store or supermarket cards. Our guide to finding the best credit card for you can help
- Don’t miss a payment: Missing payments can result in charges and loss of certain benefits, which makes it important to keep up with your balance – even if it means paying the minimum monthly amount
- Pay more than the minimum: It’s usually better to pay off as much as you possibly can, ideally the full amount. This can help you keep control of your balance and avoid going into debt
- Set up a direct debit: If you think you might not remember to make your payment each month, you could try setting up a direct debit for the minimum monthly amount to ensure you can at least meet that payment
- Set up text alerts: You can also set up free text alerts that will remind you when a payment is due or when you are approaching your credit limit
- Take advantage of rewards: Credit card rewards can be a great bonus of your credit agreement, but as they can sometimes cost extra you should take advantage when you can, otherwise you’re paying for a service you don’t use
- Time your applications: Applying for a credit card can leave a mark on your credit report, and too many of these are generally an indicator of poor finances. Timing your applications and using MoneySuperMarket’s credit card eligibility checker can help you make an application with the best chance of being accepted
Choosing a credit card
Understanding the advantages and disadvantages of credit cards, should help you decide what kind of credit card you would like.
Example questions to ask yourself include: Do I want to…
- Help spread the cost of my spending?
- Build my credit score?
- Pay down my existing debt?
- Get cashback and rewards?
- Spend fee-free when travelling abroad?
Answering these questions first will help when you look at the different features a credit card offers.
Credit cards tend to be labelled as purchase cards, balance transfer cards, rewards and cashback cards and credit builder cards – and some cards offer a combination of features to attract you. You can find out more about choosing the right card.
Compare credit cards with MoneySuperMarket
Finding the right credit card is easier when you compare your options on MoneySuperMarket. All you need to do is tell us a little about yourself and your finances, including details about your employment, income, and what you’ll use the new card for.
You’ll be given a list of credit cards that match your needs, and you’ll even get to see which cards you’re most likely to be accepted for if you apply with our credit card eligibility checker. This way you can minimise the risk of applying for a card and help keep your credit rating healthier.
Once you’ve found the card you want, just click through to the provider to finalise your application. If your provider accepts your application, they’ll tell you what your credit limit and interest rate will be set at. As soon as it comes through the post you just need to activate it – then it will be ready to use.
MoneySuperMarket is a credit broker not a lender. You must be 18 or over and a UK resident.