Credit cards have been around for ages and are one of the most talked-about financial products you can find. When you’re looking to have control over your personal finances and make smart financial decisions, should credit cards be on your radar?
Firstly, what do they do? In essence, a credit card gives you access to credit – or money – that you effectively borrow from the credit card company. There’s a set limit on the card that you can use every month, and the idea is that you pay for things with this card, then pay the credit card bill at a later date. It’s a way of delaying your payments, which many people use in instances where they might need to buy something but aren’t getting paid for a couple of weeks. You use the credit card, then when you get your wages you have enough to cover the bill a month or so down the line when it comes in.
Of course, there are lots of other aspects of credit cards that you need to know about. So, this post will look at the good, the bad, and the ugly.
The good thing about credit cards is that they let you borrow money without always incurring interest rate charges. All credit cards have interest rates, but they only kick into action when your bill isn’t paid in full, on time. If you pay your entire credit card bill in one go before it’s due, you won’t have any interest rates on top of that.
This differs from many other forms of borrowing money, particularly one that’s similar to credit cards called a line of credit. There are stories of companies like Safety Net Credit that stick a 0.8% interest on what you borrow per day! This means that you are paying back more than you borrowed, while a credit card can be used to just pay back what you borrowed and nothing else.
Furthermore, credit cards can help you build a credit score as you are borrowing money and paying it all back on time. This is the easiest way to improve your score, making it easier for you to apply for things like a home mortgage.
One last point in the good section: credit cards offer financial protection. When you buy something using your card, you are protected if it arrives faulty, or never arrives, or the company goes bust. This means the credit card provider can help you get your money back.
The bad thing about credit cards is that it’s very easy for you to misuse them. Every credit card has a limit, and you can very quickly be tempted to max out your limit as it feels like you have free money. Then, when the bill comes in at the end of the month, you can’t afford to pay it in full. This is where people pay a fraction of the bill, leaving the rest to roll over to the next month, incurring interest charges.
Additionally, when used incorrectly – such as by constantly maxing out your credit card limit – you can actually damage your credit score. It’s all about learning how to correctly use your credit card to see the good and avoid the bad.
The ugly builds upon the bad in that people get themselves into severe credit card debt. For instance, the average household credit card debt is around £1,938. This is because it is so easy to fall into a terrible cycle of making the minimum credit card payments every month.
You see, when you get your bill, you are given a minimum payment that you have to make. You could pay the bill in full, but a lot of people opt to pay the minimum amount as it is a lot cheaper and they might not be able to afford the full amount. This then means a huge chunk of your bill gets added to next month’s, along with interest. When the next month rolls around, you do the same thing; make a minimum payment, rolling over the rest plus interest. You end up in a terrible cycle of owing more and more money, ruining your credit score, and landing in a lot of debt.
Generally, credit cards are highly useful as they can help you manage your budget and protect your purchases. The key piece of advice is to avoid going close to your credit limit and ensuring that you only use what you can afford. Every month, pay your bill in full, and you won’t have to worry about interest rates or credit card debt!