The Advantages and Disadvantages of Having a Credit Card

Obviously, the major advantage to having a credit card is that you can borrow money. It may be that you want to fund a large purchase or that you want to borrow money responsibly, for something like a holiday, when you are sure that you will be able to pay it back. Having access to credit brings a lot of simplicity and convenience to people’s lives.

For more information about how credit card contracts work to provide people with access to credit, go to Chapter 6 of this guide.

Using a credit card can help to build your credit rating. Many people are unaware that if you have never borrowed money, it is harder to get a loan or a mortgage. Having a reliable credit history which shows that you can borrow money and are good at repaying it can be useful when it comes to applying for a mortgage or a personal loan.

For more information about credit ratings go to Chapter 12 of this guide.

Credit card companies are always looking for new customers. To that end, they offer rewards and bonuses on some card accounts. Purchases made using one of these reward cards earn you air mile points or other rewards, like cash back or retail scheme points.

Frequent travellers often make use of credit cards, which provide air mile points. They are rewarded for their use of the card by paying a lot less for holiday or business flights. If you use the card enough, you can even have free flights. That’s a pretty big advantage to having a credit card!

Other extras that are on offer from card companies are:

• extended warranties for goods purchased
• travel insurance
• cashback
• passes for executive airline lounges

One of the main advantages of having a credit card is that should there be a problem with a purchase you have made, you can ask your card company to refund your money under Section 75 of the Consumer Credit Act. If, for example, you do not receive goods that you have paid for, they are faulty or if the retailer goes bust before you receive your goods, you can ask your credit card company to refund you the money. Under this rule, both the credit card company and the retailer are jointly liable for the purchase you have made. While most people go to the retailer, if there is a problem with a product they receive, the retailer and your credit card provider are both jointly liable and so there is no definite first point of call.

Being able to claim money back from a credit card provider is particularly useful when a retailer goes bankrupt and is unable to pay you, or when they refuse to do so. Without being able to go to your credit card provider it would be much more difficult to get the money back in these circumstances.

This form of payment protection applies to all purchases between the value of £100 and £30,000. One useful aspect of Section 75 is that the coverage provided by your credit card provider applies to the total cost of a purchase, even if you do not pay for the full cost of it with your credit card. Even if you only pay a small fraction (even just 1p) with your credit card, then the whole cost of the purchase will be covered by your credit card company. What many people do is pay the deposit for an item with their credit card and then pay the rest of the cost with their debit card. This provides insurance for the purchase without costing a large amount in interest.

Having a credit card means that you can carry around less cash. This makes them a safer option, especially if you are travelling. It’s true that you could lose your card or have it stolen, however, with the extra new security measures that are now in place, less money is likely to be stolen. If you cancel your card immediately, you are unlikely to lose out at all.

With this in mind it is always a good idea to keep a note of your card numbers and the name and phone number of your card issuer. This way, you will have all the information to hand if you need to cancel your card.

For more information about credit card security and the risk of fraud, go to Chapter 10 of this guide.

While they should be approached with caution, cards which offer introductory interest free periods and low balance transfer fees can be used to consolidate debts. If you have a debt, which is accumulating interest on one credit card, then transferring that debt to a new card with 0% interest may save you money. If you have more than one debt, then consolidating them onto one card can simplify your repayments as well.

It is important, if you decide to do this, to read the terms and conditions of the new card carefully and to make sure that you will actually save money by doing this. Many credit cards come with a balance transfer fee, meaning that it will cost you money to transfer your debt onto your new card. There may also be additional fees. Make sure that it will not cost you more to consolidate your debts on one card. It is also important to make sure that you will be able to repay the debt in a timely fashion, in order to avoid being charged interest rates, which may be difficult to afford.

Credit card debt is a complicated issue. For more information about how to avoid debt and how to deal with it, if you end up in debt, go to Chapter 11 of this guide.

When something unexpected happens, such as a car breakdown, having a credit card allows you access to immediate funds to cope with the problem. People without a credit card are often forced to turn to quick loans from direct lenders to cover these emergency expenses instead. The huge network of businesses that now accept credit cards means you will always be able to pay for a last minute hotel room or a train ticket to get home.

Using a credit card to withdraw cash is more expensive than using it to purchase goods or services as, for cash withdrawals, interest rates are usually higher, interest is usually applied straight away and there may be other fees as well. Foreign cash withdrawals also have an even higher conversion rate cost.

Credit cards are convenient and can be an excellent tool to help you manage your finances, but a card account does not come without risks. The obvious downside is that unless you pay off the balance before the interest free period is over, it is going to cost you money in interest fees. Many people encounter unfortunate circumstances, such as losing their job, and are unable to pay off their credit card bill. If bills remain unpaid for a long period of time, interest rates can add up to a large amount.

On top of interest fees, there are often other charges as well. Credit cards can come with membership fees, administrative charges and other fees which all add to the cost of borrowing money. Typical interest rates for credit cards in the UK are around 22.5% APR.

For in depth information on how credit card contracts work and how interest charges and fees are calculated, go to Chapter 6 of this guide.

While they are safer than cash, there are various particular scams involving credit cards. Card companies might well offer compensation for card fraud but only if they are sure that you were not negligent about keeping your card details and PIN safe. While most people are able to be refunded when they are a victim of crime, this is not always the case.

Con men are often able to extract information from cardholders without them even knowing and, even if you get back the funds, it can be a very distressing experience to be a victim of crime. Nowadays, if thieves get their hands on your card details, they may be able to clone your identity or commit further criminal acts, which can cause you even more difficulty.

For more information about the risk of fraud, go to Chapter 10 of this guide.

How you borrow money with a credit card will impact your credit score. If you follow good borrowing habits, then they can be used to build a good credit score. However, if you make mistakes, they can cause you problems.. A missed payment, for any reason, can damage your credit history, and this can have an impact if you later want to take out a mortgage or a personal loan.

We will have a more in-depth look at credit history and credit scores in Chapter 12 of this guide.

Fees on credit cards are not always immediately apparent. Some cards charge an annual amount, and most will charge for cash withdrawals. Late or missed payments will often attract an additional penalty, and, if this happens a number of times, the total balance owed can easily get out of control.

Annual fees usually apply to credit cards which offer rewards like air mile points or free travel insurance. Do not immediately be tempted by rewards unless you have looked carefully at the small print as you may end up paying for them. Most bank accounts have travel insurance attached for free, so why take out a credit card which has this as well. Cards which offer cashback rewards often end up costing more than other cards, through hidden fees or membership fees.

Fees are also charged for balance transfers and this can, in some circumstances, make credit card use complicated. If you need to move money between credit card accounts, it is wise to do the maths first to see if it will end up costing you money.