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 [1]) 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 [2] 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 [3].
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 [4] 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 [5], 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 [6] – 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.