Credit cards can punish those who spend recklessly by sinking their finances into the red. But deployed in the right way, a credit card can equally be a powerful financial tool.
Consider a sharp knife. You wouldn’t be without out one in the kitchen – but you also have to respect the risk of causing yourself an injury.
In my early 20s I wouldn’t touch our allegedly flexible friends with a barge-pole. I thought they were for spendthrifts, or for those careless with their money.
I’ve since changed my tune. I now believe anyone who is confident they can responsibly handle credit (i.e. debt) should consider getting a credit card.
Let’s find out why.
Why use a credit card?
Stick with cash or debit cards and you’ll be missing out on the many advantages of using a credit card.
Perhaps the biggest benefit that comes with spending on a credit card is the free Section 75 protection you get when making purchases (which I’ve raved about before).
Put simply, buy something on a credit card costing between £100 and £30,000 and your card provider becomes equally liable for the purchase. So, if something goes wrong, you’ve another party to go to in order to seek a refund.
This can be a huge boon if the item you buy is defective and you come across a retailer reluctant to pay up. It can also turn out to be powerful protection if you buy from a company that later falls into administration.
Another advantage of credit cards is they can boost your credit score.
Lenders determine your creditworthiness based on your previous behaviour. If you’ve got little in the way of a credit history, you can use a credit card responsibly – paying back what you owe and not exceeding your credit limit – to reassure lenders by building up a solid credit record.
How else can lenders know you’re not just looking to borrow to bet on the 15:30 at Kempton?
Depending on the type of credit card you have, putting your spending on plastic can also allow you to earn cashback, rewards, borrow at 0%, or spend overseas at no cost. More on all that below.
How to choose a credit card?
The number one rule is that there’s no ‘best’ credit card for everyone. That’s because there are a number of different types of credit card.
For example, if you’re after cheap borrowing then a 0% purchase credit card will do the trick.
Patchy credit history? A specialist ‘credit card for bad credit’ is your best option.
Alternatively, if you’re paying interest on existing credit card debt then you could look for a 0% balance transfer credit card (with the aim of getting your borrowing under control, not to increase your debt further!)
How many credit cards should you have?
There’s no set answer to how many credit cards you should have. You’re allowed to hold as many as you wish, though some providers will limit how many of its cards you can hold at any one time.
However, while you can technically have as many credit cards as you like, it’s often a bad idea to apply for them like there’s no tomorrow.
Every application you make is recorded on your credit file, whether or not you’re accepted. Make lots of credit card applications, especially in a short amount of time, and you may be giving lenders the impression you’re desperate. This could – reasonably enough – harm your credit score.
There’s also ‘credit utilisation’ to keep in mind. This refers to the ratio of credit you use.
For example, if you’re given a £5,000 credit limit and you only utilise £3,000 (60%), it will probably be seen as healthy. In contrast, make use of the full £5,000 and you could be giving lenders the impression you’re struggling. That could impact your chances of getting accepted for other cards.
So while there’s nothing inherently wrong with holding more than one card, first consider why you want multiple cards.
For example, you may wish to spread out the cost of a planned and budgeted-for purchase. Then, later on down the line, you may wish to earn cashback on your everyday spending.
In this case, having both 0% purchase and cashback options in your wallet wouldn’t be reckless.
What are the different types of credit card?
Now I’ve touched on their benefits, let’s take a closer look at the different type of credit cards.
What is a money transfer credit card?
With a money transfer credit card you’ll have the power to shift cold, hard cash to your bank account.
In the past, these types of cards were crucial for those wishing to stooze.
Stoozing involved exploiting 0% deals, and then stashing the borrowed cash into a high-interest savings account.
Nowadays money transfer deals typically come with a hefty fee, and so they’re no longer as attractive as they one were. (That’s even before considering the fact that interest rates on savings accounts are pitiful right now.)
What is a 0% purchase credit card?
A 0% purchase credit card allows you to undertake interest-free spending. Spend on a 0% purchase card and you needn’t repay your balance until the end of the interest-free period.
You will however have to pay back at least the minimum payment and stick to your credit limit to keep the 0% deal.
What is a cashback credit card?
A cashback credit card will – clue’s in the name – pay you cashback for any purchases you make on it.
The most generous are typically issued by American Express. Some of its cards offer an introductory 5% cashback bonus. If you get one it’s worth setting up a direct debit to repay your balance in full each month.
Cashback cards rarely come with any sort of 0% deal.
If you’re a particularly big-spender, you might consider paying a fee to get your hands on the most generous cards. But with these cards it really pays to do the maths.
What is a reward credit card?
Reward cards work in much the same way as their cashback close cousins. The difference is here you typically earn rewards – such as Nectar or Avios points – as opposed to cash.
If you shop a lot at a particular supermarket or you’re an Avios collector, say, then they are worth considering. The rewards may well be more generous than the cash equivalent.
What is a 0% balance transfer card?
If you’re paying interest on an existing credit card debt, then a 0% balance transfer card can be the ace up your sleeve.
These cards enable you to shift debt to them. You then don’t have to pay interest for the duration of your new 0% deal.
In other words, when applying for one of these cards, anything you owe is transferred to your new card. This gives you a new 0% period in which to clear your debt.
To keep the 0% deal on these cards you have to pay at least the minimum monthly payment.
What is a ‘dual use’ credit card?
Spend on a balance transfer card and you’ll probably face high interest on new purchases. At the same time most 0% purchase credit cards won’t let you shift debt to them at all.
So if you want to borrow AND shift existing debt, you might consider getting one of each type.
If you’d rather not have two cards, though, then a ‘dual use’ card may be for you. These cards allow you to spend at 0% and move existing debt to them, so they’re a sort of ‘hybrid’.
Beware: the interest-free periods on these cards are rarely market-leading.
What is a travel credit card?
A travel credit card enables you to spend abroad without you having to pay extra for the privilege. Some travel credit cards also allow you to withdraw cash overseas at no cost.
If you’re looking to save money on travel, one of these cards should be at the top of your list.
What is a ‘credit card for bad credit’?
Credit cards for bad credit – also known as a ‘credit repair’ cards – are for those with poor credit scores. For this reason the bar for acceptance is typically low.
If you are rejected when you apply for a market-leading ‘normal’ credit card deal, a credit repair card offers a way to boost your creditworthiness.
Get one, use it responsibly, and you’ll have a better chance of being accepted for more competitive options in future.
Cards on the table
Perhaps you’re surprised at the number of different kinds of cards there are out there?
That’s probably a good thing!
It’s safest to assume the financial services industry creates products for its own benefit first and ours second. The proliferation of card varieties over the past few decades is no different.
But provided your guard is up, you can find useful financial tools here. Just avoid going into long-term debt – or if you must, definitely don’t do it by spending on a high-interest credit card!
Have I missed out anything important? Let us know in the comments below.
Typo alert: “Avois points”
Knowledge of credit cards, the good and the bad and the relative ease of accessing credit, is another thing – perhaps the most important thing – that I wish someone had drummed into me at a younger, more frivolous age. (Or I had listened earlier)
I’m still playing catch up in many ways of years of silly and unnecessary spending in my 20s, often on credit card, for example Ive only just really recently paid off my pot of ‘bad debt’ (12k on credit cards at one point at its max- how? On what?) after being in the red in credit from consumer spending for most of my adult life, until discovering frugality and the start of my investing journey in 2018, aged 32.
The start of this was finding out about 0% balance transfers and 0% fees in around 2015 and were key in this for sure. Only non-mortgage debt remaining on credit cards (on a long 0% card and slightly overpaying the minimum while investing elsewhere) is from purchasing solar panels in 2015 *just* before the FiT was dramatically cut – in hindsight a great move at the current time, alongside a long term fixed rate tariff from Octopus and get money back from export, tariffs.
What I found useful in my balance sheets on Excel was a % of total consumer debt to assets (currently debt is around 5.5% of my total portfolio, compared to, what, over 100% in 2018? – still not sure how other than silly spending) Seeing that drop away in addition to the overall pot rising to over six figures through investing has been magical. I’m not rushing to pay off the remaining balance, it’s on 0% until 2024, but chipping away alongside the usual regular deposits into my S&S Isa, Sipp, cash etc. Slight irk is that Barclaycard have upped the minimum payment quite a bit recently, which might make me consider just paying it off in a lump sum, if only for the mental ‘it’s gone’, even if it doesn’t make financial sense in a high inflationary environment.
@TI
And “Avois collector”
@Factor — Argh — these are my fault not @TheTreasurer’s. Thanks again!
FWIW: over the last few years my cash back credit card has paid a better rate of interest than most savings accounts. Go figure!
Another thing worth noting is that credit card companies like to know your salary – so, if you are planning to FIRE with zero salary – sort your cards out before you jump ship.
Did alright out of BA Amex , Platinum amex etc over the last 10+ years. Flown 1st and business class all over the world. Reminds me of the days accumulating Avios and Tesco Clubcard points through manufactured spends. 3v pre-paid cards and buying / selling Lego anyone?
Managed to get a £4k Tudor watch out of Goldsmiths from Clubcard vouchers which I sold on. I missed out on the days where you could get a Rolex before they stopped it.
@JDW I wouldn’t beat yourself up over it. I went through a similar thing. The people around me were encouraging that behaviour (including my boss) and nobody had a dissenting opinion. It was a book I picked up in the library (Your money or your life) by chance that made me start thinking about money more seriously.
Back in days when mortgages were 16% I used to obtain a relatively cheap loan by taking a cash advance on a credit card. That cost me a 1.5% handling fee. Just before the repayment date, I’d use a cash advance from another card, whose statement preparatiin date had just passed. That cost me another 1.5%. it would then be around 6-7 weeks before that needed replayed. So, I’d repeat the trick using yet another credit card. I was borrowing money at around 9-10% APR, which was something if a bargain at the time. Not much good at the moment, but would be if interest rates get silly. One of my reasons for borrowing the money was to take part in privatisations of BT, British Gas, etc, etc.
@JDW – well done, I too could have done with someone drumming it into my thick skull during my spendy days! At least you sorted yourself out in your 30s, I didn’t finally pay off my last credit card debt until after I’d turned 40 (also around the £12k mark, back in the noughties). 0% credit cards were key, as was penny by penny budgeting to keep track of my spending. It’s probably why I don’t budget (as such) these days because in my mind, I equate it with being in debt! I now use 0% credit cards for big (house) purchases, with a plan to pay off in full before the freebie runs out.
Ah, the good old days of stoozing on credit cards.
I’m old enough to have been posting on the same discussion boards as the original Stooze! (That was his forum username). I was too timid to go totally crazy but I did get nicely into five-figures of 0% credit card debt (transferred out to my bank at 0% too IIRC) earning at 5/6% for a while.
But that was nothing. A friend of mine at the time had his entire mortgage offset by cash stoozed on 0% credit cards. He had multiple cards from the same bank, if I am remembering right, and this wasn’t even officially not allowed.
He was living in a house financed on promotional offers from banks!
And people act like the easy money and meme stock madness and the rest of it of the past few years is shocking.
There’s always something crazy going on somewhere. 🙂
I like the analogy of a sharp knife, possibility closer to a power tool. Great in skilled hands or when handled with care but can be lethal if misused.
Although I’ve personally never fallen foul of them I can certainly relate to many of the comments. I thankfully didn’t really use credit until in my 30’s, I think it could have gotten out of hand if I did.
This last decade however I’ve used them for travel and also saved a bundle of interest by paying off car loans with a 0% card and then balance transfering as the deals run out. Often for no fee. Car dealerships often give discounts for taking their financial products so you can negotiate the best deal and then use the credit card to avoid paying any interest.
I’ve always been a bit of a credit card rate tart. However, as many comment the returns are no longer anything like they used to be.
I do it more for “fun” now than anything. I simply like the idea of borrowing money from financial institutions at 0% and make a 2% or more back from the money. The financial protections from sesnsible use of credit cards are also handy. Thanks to a joining incentive on an Amazon / New Day card I got my 7 year old one of his most wanted birthday presents. Of course I closed the card as soon as I got paid the incentive.
Rinse and repeat.