Credit Cards: Advantages & Disadvantages
Got your eye on the perfect pair of killer heels? Or maybe your sights are fixed on a new sound system for your beloved set of wheels? When it comes to purchasing big-ticket items you don’t have the readies for, a credit card allows you to buy an item and pay for it later. And to help sweeten the deal, many providers will throw in all sorts of perks when you choose and use their credit card too.
But it’s not all sunshine, lollipops and blasting your state of the art car stereo. Using a credit card is a form of borrowing, which needs to be managed carefully. So grab a mug of chai, sink back into the sofa and open your mind to your own future financial possibilities, as we uncover the credit card advantages and disadvantages you need to be aware of…
What are the benefits of using a credit card?
As anyone who’s ever been afforded the luxury of landing a ticket for their favourite festival before payday has come round can attest, the biggest benefit of using a credit card is being able to buy something you want, when you want it. Credit limit depending, of course. But there are other benefits that are less obvious.
Not sure if a credit card is right for you? See our guides to understanding credit cards, which credit card is best for me or find alternatives to credit cards here.
Benefits of using a credit card: a summary
- Spreading the cost
- Built-in protection
Credit cards can be a convenient and speedy way of securing a purchase that you just cannot wait for. This might be for emergency reasons or simply timing – what you need simply won’t be there when the time payday comes back around.
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. Quids in, huh? 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.
Next, and this is a biggie. Stacked up against your debit card, a credit card boasts the ‘super power’ of Section 75. What’s that?
Well, when you use a credit card to buy something that costs upwards of £100, up to a limit of £30,000, you get protection under Section 75 of the Consumer Credit Act. This means that should your goods not show up or not meet expectations as advertised, your credit card provider is jointly responsible for the transaction and you should get the money back from them.
This is great news if 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, 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 (don’t write that pin down and put it in your purse, okay?).
These are the basic benefits of using a credit card. Take out anyone of a number of specialist cards with different high street and retail providers and you may be offered a range of attractive ‘perks’ too.
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 put yourself onto a nice little earner.
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.
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
- 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 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.
Management tools for credit cards
Setting up a direct debit for the full amount you spend each month is a good way to start, 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.
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, which can be as welcome as a sandstorm in the desert. 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.
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. Repeat after me “I will not withdraw money on my credit card to go on unplanned nights out.” Got it? Great.
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 if you’re more comfortable with that. Not everyone needs a credit card though, but as we’ve outlined in the benefits and perks section of this guide, they can be handy things to have.
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 louder than a symphony of dreamcatchers, so do your research and ensure you fulfil the criteria before you go ahead and apply for a particular card.
Our MoneyMatcher highlights features like charges and annual fees and perks like cashback, so you can see how cards stack up against each other, making it easier to find the one that’s right for you.