When is a credit card is better than cash?

When you hear the word 'credit card', do you automatically associate it with the word 'debt'? Many of us do and yet using a credit card can actually make great financial sense.

Providing you use your plastic sensibly – which means paying off your balance every month, spending on a credit card has far more benefits than paying by cash. If you don't believe me, perhaps the following five reasons will convince you.

1. You can spread the cost of a purchase without paying interest

If you have a big purchase coming up, whether it's a new car or home improvements, many credit cards offer interest-free spending for a certain period. This will allow you to spread the cost of your purchase over a number of months, without worrying about the interest stacking up, making it far more manageable.

For example, the Tesco Clubcard credit card offers 0% on purchases for 16 months, while the M&S credit card  offers 0% on purchases for 15 months. Ensure you clear your balance in full before the interest-free period ends, otherwise you will be hit with a representative annual percentage rate (APR) of 16.9% (variable).

2. You can earn rewards for your spending

As well as offering interest-free spending, the Tesco and M&S credit cards also allow you to earn reward points as you spend.

The Tesco card doubles as a Clubcard so you will earn points every time you spend at an accelerated rate of five points for every £4 spent in Tesco stores and petrol stations, and one point for every £4 spent elsewhere. It's the ideal card to have in your wallet if you're a big Tesco shopper.

Meanwhile, the M&S credit card earns you M&S reward points – you earn one point for every £1 you spend in M&S and one point for every £2 you spend elsewhere. These points translate into M&S reward vouchers (100 points = £1) which can then be redeemed in-store.

Alternatively, if you're a frequent flyer, you can collect Avios (airmiles) with the Lloyds TSB Duo credit card or the American Express British Airways card. Once you've collected enough Avios, you can redeem these on flights with British Airways. However, there is no interest-free spending on these cards and APRs are high so you must clear your balance in full every single month.

Compare these credit cards and more on our credit card channel.

3. You can earn cashback for your spending

If you religiously pay off your balance in full each month and you find the above rewards too restricting, consider choosing a card that offers cashback instead.

For example, the Barclaycard cashback card offers 6.00% cashback on your five biggest purchases in the first three months, up to £120. After that, you will earn 2.00% cashback on your top five monthly purchases and 0.5% on everything else. You'll also get a 4.00% 'thank you' bonus on your top five purchases in the month after your card anniversary. But watch out because there is a £24 annual fee.

Alternatively, the American Express Platinum Cashback card allows you to earn 5.00% cashback, up to £125, in the first three months and 1.25% after that. You also receive 2.50% cashback for one month every year.

The Platinum card comes with an annual fee of £25 so if you'd prefer a fee-free option, the American Express Everyday credit card also offers 5.00% cashback in the first three months up to £100. After that, the cashback rate is tiered. On spending up to £3,500 you will receive 0.5% cashback, spending between £3,501 and £7,500 earns you 1% cashback and anything over £7,501 gets you 1.25% cashback.

But while there is no fee on the Everyday card, you will need to spend at least £3,000 a year. And you need to act fast as this card is being withdrawn on Thursday, February 28.

Compare a whole host of cashback cards through our comparison service.

4. You gain protection on your purchases

Not only can you benefit from rewards and cashback, but paying by credit card instead of cash means that your purchases will be protected under Section 75 of the Consumer Credit Act.

Should your goods be faulty or fail to turn up, your card provider and the seller will be jointly liable and you'll be able to claim your money back – as long as the items bought cost between £100 and £30,000. This applies even if you only paid for part of your purchase with your credit card – for example, if you put a deposit for your holiday on your card and pay the rest in cash.

The Consumer Credit Directive boosted this protection further in 2011 and allows you to claim back up to £60,260.

5. You can improve your credit rating

If you have never had credit in the past, you won't have a credit history. This could work against you should you later need to apply for a mortgage or loan.

But spending responsibly on a credit card can help you to build up your credit rating and, providing you keep up with your repayments, this can give you access to better deals in the future.

Even if you have had trouble with credit in the past, a credit card can help. That's because some are designed specifically to help customers improve their credit score. However, these cards don't generally offer interest-free deals or rewards.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct. We're free, independent and compare all UK credit cards, as well as offering exclusive deals you can't get anywhere else. Contact MoneySupermarket.com at Moneysupermarket House, St David's Park, Ewloe, Flintshire, CH5 3UZ. © Moneysupermarket.com Ltd 2013.

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