7 reasons to get a credit card
Many parents and grandparents still continue to warn their offspring about the perils of getting a credit card. Many will say that you should never ever get or use one and warn that “you’ll never get out of debt…”.
However, times and credit have significantly changed since the swinging 60s and the many benefits of getting a credit card in this modern, credit-driven world mean you could actually be missing out by not having and using one (responsibly).
If you’re asking yourself, “should I get a credit card?”, read on to find out the many positive reasons for using one and how, if you use one responsibly, credit cards can work for and not against you.
Is it worth getting a credit card? - Here are 7 reasons to get one
1. Improve credit score
When you apply to borrow money, lenders will take a look at your credit report when assessing your application and if there’s nothing on your report for them to see, you will struggle to get any sort of credit whatsoever.
The downside is that credit-building credit cards tend to have higher interest rates (APRs) because you’re seen as a high-risk borrower due to your non-existent credit history. However, if you’re disciplined and only use up to 25% of the credit limit balance of your card and clear the balance in full every month, you will avoid hefty interest charges and will build up your credit history and score nicely.
This means that if you have a credit limit of £1,500, you should not spend more than £375 in any one month for the ultimate in credit building.
To make sure you pay off your credit card every month, you should set up a direct debit as if you miss a single payment or pay late, this will harm instead of boost your credit rating.
Read more: What is credit card utilisation?
Is it good to have a credit card and not use it?
Yes, it can be, as other lenders will see that you have credit available to use that you’re not having or choosing to use, thus showing that your finances are under control, you’re not desperate for money, and you are a responsible borrower.
If your credit card account is inactive for a long period of time, however, your provider may close your account, so it’s worthwhile using your card little and often to make a small purchase every now and then, as long as you make sure you pay back the full balance by your payment due date.
Also, make sure you keep an eye on a dormant credit card account in case fraudsters start to use it.
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2. Cash back and rewards
There are certain types of credit cards where you can earn cashback or rewards whenever you use your card to spend money.
If you use a cash back credit card to make purchases, you will receive a small cash payment back to your credit card account. This is usually a very small percentage (around 1-3%) of the amount that you’ve spent.
So if you have a cashback card with a 1.5% cash back rate and use it to purchase something costing £300, this means you’ll get £4.50 cash credited to your account.
Instead of cash, rewards credit cards similarly reward you with points when you spend. Once you have built up a certain amount of points, you can then exchange your points for gifts, products, services or experiences.
Some other types of cards can reward you with discount vouchers or free air miles.
For more detailed information on these types of cards and what they can offer, take a look at our guide: Cashback and reward credit cards explained.
Some cards offer discounts on entertainment or hotels and some may allow you to use exclusive airport lounges. You will have to pay a fee for this type of card and this can be expensive, so you will need to figure out if using the card will be financially beneficial to you.
Other types of discount cards are retail store cards that usually only offer a discount of between 10% and 20% off your first purchase. These can be useful if you simply use them for an initial, large purchase but due to eye-watering APRs, should be cleared immediately and left dormant or, if the credit limit is small, closed after your first purchase.
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4. Purchase protection
Credit card protection is afforded on card purchases costing between £100 and £30,000, so if something costs £99.99, it’s not covered.
Under Section 75 of the Consumer Credit Act, your credit card provider is obliged to compensate you if a purchase made using your card results in financial loss (i.e. the goods were never received by you or they were faulty or inadequate).
Before you can make a claim against your card provider under the Act, you must first contact the supplier to seek compensation or try making a claim on any insurance you may have in place. If neither the supplier nor insurance provides compensation, you can then seek compensation from your card provider.
5. Spending abroad
Instead of exchanging huge wodges of cash before you go on holiday or getting stung by extortionate debit card fees, you should use a certain type of credit card to make purchases abroad.
In addition to offering purchase protection outside of the UK, if you’re savvy in your choice of card, you can avoid paying commission and get a better exchange rate on purchases. Only certain providers waive their fees abroad so shop around to find the right card.
6. Earn interest from borrowing money
Whilst this paradoxical term is certainly no ‘get rich quick’ scheme, especially in the current low-interest earning climate, if you are solvent and shrewd, you can actually earn money from using 0% credit cards.
In the financial world, this practice is known as ‘stoozing’ and can be an alternative to using a cashback credit card.
If you use a 0% spending card for all of your day-to-day spending, you can earn interest on the cash you would otherwise have used, safely stored in an interest-paying bank account. When the 0% deal expires, you should use the money you have saved to settle the full balance on your card and hey presto, you have earned interest on borrowed money.
7. Big purchases
If you need to pay for something expensive like a holiday, new sofa or kitchen, and want to spread the cost, a 0% purchase card can be a fabulous tool, as long as you’re certain you can pay off the full balance before the interest-free period ends.
In addition to making big purchases more affordable, you again have the added benefit of purchase protection under Section 75 of the Consumer Credit Act.
If you’re unable to pay off the full balance within the interest-free period, the interest rate typically applied is very high. For this reason, it is usually beneficial to transfer any balance to a 0% balance transfer card but you will have to pay a fee - usually 2-3% of the balance transferred.
So grab a calculator and work out whether the interest you’ll have to pay on your original credit card balance is less or more than the balance transfer fee.
For more information regarding credit cards and your credit score, check out our range of handy guides below.