You may have never had a credit card before, and with all the bad press relating to high levels of debt, they can seem intimidating to those not sure about how they work. However, when used responsibly, a credit card can prove to be an invaluable tool for any wallet or purse.
Credit cards can help to build a good credit history, allowing for favourable interest rates on loans, reduced insurance premiums and even a new mobile contract. Credit cards offer a cheaper way of getting travel money through 0% FX cards (more regarding these here). They can also earn rewards (airmiles, hotel rewards, cashback and shopping vouchers) on your everyday purchases and protect those purchases through section 75 of the Consumer Credit Act 1974 (more about purchase protection can be found here). The card statement even counts as a proof of purchase - should you lose your receipt!
Credit cards also allow you to maximise the amount of interest you earn from your current account - as credit cards are billed monthly it is possible to keep a full month's disposable income in your main current account accruing interest by paying the card balance in one large payment after pay-day. Rather than depleting the account balance bit by bit, with every purchase (as with a debit card).
Simply put, if used responsibly a credit card can be far more useful than a debit card.
What is a Credit Card?
A credit card may look like a debit card, however, the money spent isn't immediately deducted from your current account. Instead, you essentially take on a short-term loan (up to the value of your card limit), which may or may not accrue interest depending on when and how you pay the card off.
For purchases made in any given billing cycle - which is around 30 days - you will receive a small grace period before payment is due. This means that purchases made in January, won't need to be paid until mid to late February!
If you pay the balance in full by the payment due date, there will be no interest charged to your account. If you pay less than the entire balance, you will accrue interest for the remaining balance at the advertised rate (normally between 15-30% depending on the issuer).
If you choose not to clear the full balance of the credit card in any given month, you must make the minimum payment amount stated on your statement! A common misconception surrounding credit cards is that it can improve your credit rating if you miss a payment. The truth is that missing a payment is one of the worst things you can do with a credit card. It shows lenders that you cannot manage your finances and will negatively impact your credit rating.
Why should you get a credit card?
As mentioned, credit cards offer numerous benefits. Perhaps the most important of which is the impact it can have on your credit rating. Credit cards are perhaps the fastest way of building a credit history. Clearing your balance each month, tells lenders that you are in control of your finances, boosting your credit score. A good credit score helps you to receive future loans (eg. mortgages) at the most favourable rates. It also helps you to get approved for mobile phone contracts and to avoid utility deposits / prepay meters.
Aside from credit building, credit cards also offer a host of other rewards and perks. Many cards (particularly those featured on this site) offer cashback or travel rewards generally between 0.25% and 1.5% of your purchase price. The interchange fees charged to the merchant during the transaction fund these rewards. Unfortunately the EU capped these fees at 0.3% of the purchase price in an attempt to clamp down on excessive card fees being charged to the consumer. As such many cashback rewards were cut or dropped overnight when the new restrictions came into place, whilst the excessive card fees remained!
Other cards also offer extended 0% interest on purchases or balance transfer deals.
How the grace period works
Another major benefit to spending on credit cards comes from the grace period. This is the time between the statement date and payment due date and is typically 21 - 25 days.
If your statement period runs from the 5th of January to the 4th of February, with a payment due date for the 1st of March, any purchases made between the 5th of January and 4th of February would be interest free until the 1st of March. You would only pay interest if you failed to clear the full balance of your statement by the 1st of March. Spending after the 4th of February would be on the following statement (due on the 1st of April in this scenario).
Finally, don't be put off by some of the annual fees. These are particularly prevalent on the reward cards. Take the BA Premium Plus American Express card for instance. It has a card fee of £195 which looks horrendous at first glance. However, the companion ticket that this card generates can be worth as much as £3,000!
Look at the value of the rewards offered by the card, and the likelihood of you attaining them - use this to decide whether the fee represents value for money.
It should be noted that by discussing credit and charge cards on this site, we are in effect, acting as a credit broker. Expert with Points Ltd is authorised and regulated by the Financial Conduct Authority (FCA FRN 792662) to act as a credit broker.
This is a journalistic website, as such, we merely describe different travel related credit card options available to you; it is your responsibility to determine whether these products are suitable for your financial circumstances. Nothing on Expert with Points should be seen as constituting financial advice. Recommendations given, for any financial products, are based on the benefits and perks they offer.