Credit Cards: Advantages & Disadvantages
A credit card can be a convenient way to spread the cost of a large purchase or pay for something you need when cash funds are a little low. They’re great for travel, safer to carry around than lots of cash and many come with cash back offers or perks, meaning you’re rewarded with a little extra benefit every time you spend.
But, as with any form of credit, if you do not plan ahead and manage your finances well, you could fall foul of high-interest rates, late payment fees and spiralling debt.
Let the Money Guru guide you through the advantages and disadvantages of credit cards
What are the benefits of using a credit card?
If you’re thinking of taking out a credit card, you probably already have a particular reason for doing so, but it’s a good idea to understand all the benefits you could gain so that you can make an informed choice about which card to go for.
Being aware of the pitfalls of a credit card is also just as important. It’s easy to be swayed by special offers but you want to pick a card that serves you well in the long run.
Benefits of using a credit card: a summary
- Convenience and speed
- Spreading the cost
- Built-in protection
- Borrowing for free, as long as you pay your full balance every month
- Switching your balance
- Management Tools
Convenience and speed
Credit cards can be a convenient and speedy way of securing a purchase that you can’t wait for. This might be for emergency reasons or simply timing – what you need might not be available or there may be a time sensitive deal you want to catch.
Spreading the cost
Providing you pay off the full balance of what you owe before interest kicks in, and you choose a credit card that doesn’t have an annual fee, you can get your lust-haves at no additional cost to yourself. If you can’t quite afford to clear the balance of your credit card all in one go you can choose to pay for item(s) in instalments, along with the monthly interest you’re charged on your balance. Thus, you also have the option of spreading the cost on more expensive purchases
When you use a credit card for a purchase between £100 and £30,000, you have an extra layer of protection that a debit card wouldn’t be able to provide. Under Section 75 of the Consumer Credit Act, you are covered for loss or if a product is not as advertised. This is great news if, for example, you’ve bought a plane ticket from an airline that’s gone bust, or your new freezer has left a puddle in the kitchen. It’s also worth knowing that you don’t need to have paid for the item in full on your credit card, as the protection is activated when you spend £100 or more.
So, even if there’s a charge for using your credit card to pay for something like a holiday deposit, or a concert ticket, you may want to consider doing so for the extra peace of mind. There’s also built-in protection against fraudulent use of your card, providing it doesn’t result from your own negligence (so don’t write that pin-down and put it in your purse).
Borrowing for free
Some providers offer periods of 0% interest, meaning you can effectively borrow for free during that time. You’ll still need to make the minimum monthly payments and clear your balance before the time period ends, but it can really help you to manage your cash flow or pay for an item interest-free over a few months.
Switching your balance
Many providers offer a 0% balance transfer, which is a good option if you have several cards, including store cards with high interest rates. By transferring them all onto a 0% balance transfer card, you’ll end up paying less interest overall, provided you pay off your debt before that 0% offer period ends.
If you’re going abroad or spending on foreign websites, there are specialist credit cards that ensure you have the best exchange rate worldwide. Credit cards are also more widely accepted in restaurants and stores than debit cards and you can also use them for reserving hotel rooms and car rentals.
Credit card perks
Credit card perks are many. From air miles to cash back and vouchers for high street shopping, credit card providers try to lure you into borrowing with them by offering their own credit card reward schemes. If you’re able to pay off your full balance each month, you could be a good candidate for one of these cards and earn yourself some nice little treats every time your spend.
However, as soon as you start paying interest on your borrowing, you are paying for those perks. Chances are, it won’t offer you good value. If you’re on the lookout for a card with its own reward scheme, be sure to check all the terms and conditions fully as you may be required to make a minimum spend every month or over the course of a year in order to qualify.
Management tools for credit cards
Setting up a direct debit for the full amount you spend each month is a good way to start ensuring that you manage your credit card finances well, providing you can afford to cover the balance. Many cards now come with a range of management tools to help you keep things in check. Smartphone apps, reminder texts and online account access are designed to help you manage your borrowing – and paying it back – more effectively.
Be clear about what any points awarded are worth in real monetary terms. Check also if you need to pay for extras like taxes on air mile flights. Beware of annual card fees to ensure those perks don’t turn into irks.
The risks of using credit cards
Risks of using a credit card: a summary
- Be aware of charges
- The temptation to spend more
- Potential interest charges
- Not picking the right card for your needs
- Can affect credit scores
The risks of using credit cards concern your finances now and in the future. If you’re the kind of person who finds money burns a hole in your pocket and you’ve always got your overdraft maxed, the ability to impulse-spend on plastic could prove a temptation too much.
Although there are some good interest rate deals around, consistently living beyond your means is expensive and can cause your finances to spiral out of control. If you’re not careful and responsible, that new outfit or meal out will cost you a lot more than the ticket price.
Be aware of charges
It’s not just the risk of spending on your card either. Some providers allow you to withdraw money on your credit card. Not to be confused with a balance or money transfer, when you withdraw money from the bank machine on your credit card, your lender will usually charge you a substantial fee for the privilege.
The temptation to spend more
If you’re a dab hand at managing credit and have your willpower in check, holding a credit card can help you build a credit profile to impress future mortgage lenders. Manage a card badly and you’ll do the opposite. Making late payments, going over your credit limit or withdrawing cash regularly from your card can all have a negative impact, so think hard about what you’d do to handle credit responsibly before you sign up.
Potential interest charges
Even if you’re a great borrower who always pays on time, there’s still the chance you could be affected by things outside of your control like interest rate rises. Rates don’t just change when introductory rates expire.
Lenders can change the rate of interest you pay on borrowing providing they give you written notice. If this happens, you can opt out of the rate change but you’ll need to inform your lender, stop using your card and pay it off within an agreed timeframe.
Not picking the right card for your needs
If you sign up for a card based on a time-limited offer, you may find that the card does not suit you well once the offer is over. Don’t be drawn in by flashy deals. Make sure that you compare cards to see which one will be better for you in the long term.
Can affect credit scores
Using your credit card in an irresponsible way can also harm your credit rating as it’s usually seen as a sign of poor money management.
Why do I need a credit card?
If you don’t trust yourself to manage a credit card well, simply put, it’s best to stay clear. While holding a card and paying it off can help build your credit profile, failing to make payments on time or going over your limit can result in charges and have an impact on your ability to borrow in the future.
If you’re considering dipping your toe in the water of credit card spending for the first time, you may want to start with a lower limit than those offered to you by lenders. Don’t forget, you can ask for your limit to be increased or decreased at any time. Not everyone needs a credit card, but as we’ve outlined in the benefits and perks section of this guide, they can be handy for a number of different reasons.
If and when you decide to add a credit card to your financial arsenal, it’s always wise to compare lenders and products. Remember, it’s not just APR you need to consider. Making a flurry of applications can set alarm bells ringing for providers, so do your research and ensure you fulfil the criteria before you go ahead and apply for a particular card.
Our moneymatcher uses a soft search to match you with cards you’re most likely to be accepted for. It also highlights features like charges and annual fees and perks like cash back, so you can see how cards stack up against each other, making it easier to find the one that’s right for you.