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Credit cards – a financial stepping stone or a financial burden?

Updated: Feb 17

Getting a credit card might feel like you can open more doors financially, but it’s important to understand the risks and rewards that come with them



Ah credit cards – they seem like the dream when we’re growing up, don’t they?


It might seem like getting a credit card for yourself is the next financial stepping stone into adulthood (whatever “adulthood” means) – and it definitely can be. But as with everything, it’s important to understand the ins and outs of how credit cards work, the benefits and the risks associated with them, and how you can make the most of them (research isn’t reserved for scientists, mate).

 

There are two types of bank card that let you access money – a debit and a credit card


A debit card is something your bank will usually give you when you open an account with them, so you can start using the money that’s in your account. So what you earn, you can spend or save. When you run out of money in your account, you can’t spend any more (unless you have an overdraft) – the more money you put in, the more money you can use. So, it’s really dependent on how much dough you’ve got in the bank.


A credit card, on the other hand, is more like a loan. It gives you access to a certain amount of money (depending on your credit score) that’s essentially yours (even though you actually haven’t earnt that money yet) – but that you have to pay back at the end of the month – possibly with some interest added on.

 

What are the benefits of getting a credit card?

Loads and loads of benefits, my friend – if the fact that you have access to more money hasn’t sold you on them yet:

  • Being able to make larger purchases sooner rather than later: I know it sounds like procrastination, but credit cards really do give you more financial freedom to make big or small purchases today rather than putting them off until payday (so you can get that new desk you’ve needed to WFH ASAP!)

  • Cashbacks, rewards and discounts: Credit cards usually come with loads of perks every time you use them. So, you could get air miles, shopping loyalty points at retail outlets and even cashback for using your credit card (yes, this is free money).

More protection for your purchases: If something’s wrong with your purchase (lost, stolen or damaged), you can claim your money back from your credit card provider under Section 75 of the Consumer Credit Act. You have buyer protection (often this only applies to stuff worth between £100 to £30,000 – but some providers could go higher and lower too!).

  • Interest-free credit cards: Some credit cards even come with 0% interest for a certain period of time (there is still good out there in the world!). That means the credit card provider won’t charge you any interest for the money you spend as long as you pay it back within that period of time.

 

When you get a credit card, you don’t always have to pay everything you spent at the end of the month. You often just have to pay back a minimum monthly repayment amount which varies from provider to provider. It could be a percentage of your balance or a fixed amount.


So, for example, if your provider’s minimum monthly repayment amount is £100 (or 25% of your balance), and you’ve spent £400 on your credit card, you only have to pay that £100 at the end of the month and the remaining £300 gets carried over to next month’s balance. Although, don’t forget, that also means more interest on any amount you don’t pay off!

 

And what are the risks of getting a credit card?

Everyone’s got their baggage, right? So do credit cards. Here are some of the risks that come with owning a credit card:

  • Debt and bad credit scores: If you don’t stay on top of your credit card repayments, you could get trapped in credit debt (yup, all those scary stories are true). And the more interest that piles up, the more debt you’ll be in – which will damage your credit score too (and you thought your Uber rating was a problem).

  • Extra fees: If staying in the interest-free period wasn’t enough to worry about, some providers also charge extra fees for when your payment is late or when you go over your credit limit. So, there might be more than a few numbers to keep track of.

  • Credit cards aren’t as free as you might think: I mean, it’s definitely not free money. But it doesn’t help when credit card providers charge you for things like withdrawing cash from an ATM or buying things overseas – some of which are free when you use a debit card instead.


So how can you make the most of your credit card?

NGL, getting a credit card really does make you feel more like an adult. And as I mentioned before, there are loads of benefits – you’ve just got to get the right balance.

  • Choose the right credit card: There are so many types of credit card out there, whether you’d like to pay less interest every month, or want to spread out the cost of a big purchase, or even pay less on your existing debts. Make sure you do your research so you can make the right choice for your needs.

  • Pay back more than the monthly minimum repayment: You have to pay back your minimum repayment every month, but if you can afford to pay back a bit more, it would mean lower interest charges for you. And a good move would be to set up a direct debit so you don’t miss your regular repayments (no, those calendar reminders aren’t going to help).

  • Check in on your transactions: We hear a lot of stories about credit card fraud, but don’t lose sleep worrying, just make sure you stay alert and check in on your transactions to make sure they’re all yours (even when you don’t want to believe you spent £250 on a new pair of trainers). And if there is any fraudulent spending, you can report it to your provider, who’ll freeze your account – and you won’t be held responsible to pay back that money or any interest on it.

Conclusion:

So, there you have it – the whole shebang on credit cards. As usual, as your financial therapist, I can’t give you the answer to the question in the title. It’s entirely up to you, and what you think is right for your circumstances.


Remember: Credit cards aren’t a magic portal to free money (far from the wardrobe that takes you to Narnia). They’re able to give you more power and control over your finances, but as Uncle Ben (R.I.P) once said – with great power comes great responsibility. So, use it wisely (and using it for takeaway every night of the week does not classify as wise – or healthy?).