What are the advantages and disadvantages of a credit card?

Thinking about getting a credit card? Read about the pros and cons before applying.

Is it good to have a credit card?

Credit cards are handy. They can help you spread the cost of a large purchase, build up your credit history or qualify for rewards. But it’s important to use them responsibly. If you struggle to control your spending, you could rack up a lot of expensive debt.

Why do I need a credit card?

You might want a card to:

• Spread the cost of a large purchase
• Improve your credit rating
• Lower the cost of existing borrowing
• Use as a back-up in emergencies
• Benefit from cashback or rewards
• Use when travelling abroad

We’re a credit broker not a lender^†

What can a credit card be used for?

You can use credit cards to pay for goods or services and even some bills. You can also withdraw cash at an ATM with a credit card but it’s expensive.

Credit cards work abroad too but it’s often best to get a travel credit card to avoid high charges.

How do I choose a credit card?

There are several types of credit cards. The benefits of each type of card vary. Think about how you intend to use your credit card before choosing one.

• 0% purchase cards. Spread the cost of large purchases and pay no interest for a set period.
• 0% balance transfer cards. Transfer existing expensive credit card debt to a 0% rate for a set period. There may be a fee for doing this.
• 0% money transfer cards. Transfer money to your bank account to pay off an expensive overdraft or to give yourself a 0% loan. There may be a fee for doing this.
• Credit builder cards. Improve your credit rating.
• Rewards cards. Earn cashback, air miles, points or rewards when you spend.
• Travel credit cards. Save money when spending abroad.
• Low-interest credit cards. Pay a low interest rate on an ongoing basis.

What are the benefits of credit cards?

Here are five advantages of credit cards.

• You can spread the cost of purchases. You can buy something now and spread the cost over several months.
• You can borrow interest free. If you repay your bill in full each month you won’t pay any interest (unless you’ve made cash withdrawals). And 0% purchase, balance transfer or interest free cards let you borrow interest free for a set period, but there may be a fee.
• You can build up your credit history. If used responsibly, they help improve your credit score.
• You can earn rewards. Some cards let you earn cashback and qualify for perks as you spend.
• Useful for financial emergencies. Using your credit card is faster than getting a loan and usually cheaper than an overdraft.

We’re a credit broker not a lender^†

What are the disadvantages of credit cards?

Here are five disadvantages of credit cards.

• High interest rates. Credit card rates can be high compared to other forms of borrowing.
• Debt can build quickly. If you only pay the minimum payment on your credit card each month, it can take a long time to pay off your debt and it could cost you a lot in interest.
• Risk of damaging your credit score. If you miss repayments, are late paying or go over your credit limit, you’ll damage your credit score.
• Fees. Some cards charge annual or balance transfer fees. And there are charges for things like missing your monthly repayment.
• Expensive cash withdrawals. You’ll pay interest from the date of your cash withdrawal, even if you pay off your bill in full, and there may be fees too.

How to get the most from your credit card

Ideally, you should pay off your credit card in full each month then you’ll usually pay no interest. Alternatively, try to pay more than the minimum repayment your provider sets. The more you pay, the less interest you’ll incur overall.

Set up a direct debit to ensure you pay on time and avoid late or missed payment fees.

As you come to the end of the promotional period on a 0% deal, get ready to switch credit cards so you don’t roll onto a high interest rate.

Only get a rewards card if you know you can pay off your bill in full each month. If you pay interest, it’s likely to outweigh any rewards.

Should I get a credit card or a debit card?

Credit cards and debit cards work differently.

With credit cards, you borrow money from the credit card provider which you repay later. Interest is charged if you don’t repay your bill in full each month. With debit cards, the money is taken straight from your current account. You won’t pay interest (unless you go into overdraft).

Generally, it’s useful to have both a credit card and a debit card as each works better for different things. For example, car hire companies and hotels often insist you pay with a credit card. But debit cards are cheaper for cash withdrawals.

Is a credit card safe?

Credit cards are safer than debit cards. Anything you buy with your card between £100 and £30,000 is protected under Section 75 of the Consumer Credit Act. So, if something goes wrong, you can claim your money back from the card provider.

In addition, if your card is used for unauthorised transactions, you’ll normally be able to get your money back.

You do not get this protection with a debit card.

What credit limit will I get?

Your credit limit is the maximum amount you can spend on your card and is set by your provider.

Avoid maxing out your credit card. Lenders see this as a sign of potential financial problems, and it could make borrowing harder and more expensive in the future. Instead, aim to keep the balance on your card to 25% or less of your limit.

What to consider before getting a credit card

There are several things to consider before you get a credit card. These include:

• Make sure any extra debt you’re taking on is affordable.
• If you’re going to use your card to borrow, compare the costs with getting a personal loan instead.
• Check your credit score and take some steps to improve it. This will increase your chances of getting a good deal.
• Understand that you might not get the advertised interest rate. Instead, the rate you get will depend on your credit score and personal circumstances.

How to apply for a credit card

You can apply for a credit card if you’re 18 or over and are a UK resident with a regular income.

Avoid making too many applications in a short space of time as it can suggest to lenders that you’re too reliant on credit and therefore a higher risk.

When you compare credit cards with Experian, you can see your eligibility rating which means you can keep your number of applications down by only applying for cards you’re eligible for.