How2: “Do You Take Credit Card?” - An All You Need to Know Guide.
Hey guys and girls, it’s me again, with a guest blog! This might be a bit of a long read, so get a cup of tea, get comfortable and read away.
If you have read my previous guest blog post ‘Credit Scores – The 3-digit number you should care about’, you would have seen that the use of credit cards is very closely linked to your Credit Score. You may have been told that credit cards are bad or having one will damage your credit score, that is partially true – but only if you don’t use them properly! Credit cards actually have many benefits if you choose to get one, although they need to be used with caution. Before we delve into the benefits, tips for using credit cards and the different types, as always let’s define what they are - ‘A credit card is literally what it says on the tin – a card that has credit which you borrow to pay for things. Every month you will have pay off the balance you spent on your credit card either in full or in part depending on your credit card provider’.
When you get your credit card statement every month, there are 3 essential pieces of information you will receive, they are key to helping you use your card responsibly and build your credit score
· Outstanding balance – the amount you’ve spent on your credit card, plus any interest or charges
· Contractual minimum payment – the minimum amount you need to pay off every month
· Payment due date – when you need to pay by
There are many considerations and cautions you need to be aware of before applying for a credit card, so before you swipe away, here are some key ones
APR (Annual Percentage Rate). This is essentially how much the credit will cost you if you don’t pay it in full in the month. If you see ‘representative APR’, this is a quote that most people are offered, but if you don’t have a good credit rating, you might pay a higher rate of interest than advertised. Let’s look at an example. Let’s say in the current month you have £500 left to pay off but haven’t been able to this month and the APR is 25%. The amount of interest you will pay in the month for not paying off that full balance is roughly £10.41 (£500 x 25% / 12 months).
High-interest payments. The smartest way to use a credit card is to pay your balance in full every month to avoid paying interest. If you don’t clear your balance at the end of each month you will keep incurring interest and end up paying back a lot more than what you had borrowed. If you’re not careful, you can quickly spiral into debt if you continue spending and accumulate a lot of interest. APRs can often go up to highs of 36%!
Unwanted charges. Some providers require you to pay the full balance you’ve used every month, if you fail to pay it you can incur late fees. Some providers only require a small minimum payment and offer you flexibility to pay the full balance over several months although you will still incur interest on any unpaid balances, if the minimum isn’t paid you will also get charged a fee. Some cards also charge an annual fee, so try to opt for one with no annual fee. Keep any eye out for the asterisks (*), this means there’s some extra terms and conditions you need to know about!
You might be thinking right now, all these fees and charges why would I even want one!? But when you use them right and make payments on time then they are really useful! There are many different types of credit cards and sometimes it can be daunting to choose which one is best for you. Here’s a quick summary of some of the types of credit cards you can get:
· Rewards cards gives you access to benefits and incentives, such as points, vouchers, or cashback on purchases every time you use the card.
· Purchase cards are designed to be used for shopping, and many of them offer low or 0% APR when you use them for purchases. This means you can borrow money for free for a certain period. When a credit card provides 0% APR for ’12 months’ for example, this means you don't have to pay interest on purchases for that period. Once the period runs out, the card will be switched to the regular APR. An example: if you buy a new laptop during month 10 of the 12-month 0% period, you won't pay interest on it for 2 months. After the 12 months is up, interest will begin to accumulate on the unpaid balance. Be extra careful as some credit cards specify terms like the interest free period only applying to purchases made in the first ‘90 days’ of opening your account.
· Balance transfer cards allow you move to an existing debt over to a new credit card, where you can pay off your balance on other credit cards with a cheaper rate of interest. Money transfer cards are similar to a balance transfer card, but instead you move money from your credit card into a bank account. This can be useful for paying off a loan or overdraft.
· Overseas cards can be used abroad without incurring a fee. They can be a useful to manage your holiday spending.
Now we’ve discussed some of the types, here are some of my personal suggestions of good credit cards I have come across (disclaimer: there are many out there but these suggestions are based on my own experience and research, remember to look out for the APR offered, read the benefits, associated fees, & all the T&Cs!)
I personally have a credit card with American Express or AMEX for short and truthfully it has been rewarding! My credit score has improved since I opened my card about a year ago and it has been super handy. I use it for small and big purchases, as well any unexpected spends. I currently use the Platinum Cashback Everyday Credit Card. This is a cashback reward card where for the first six months you get 5% cashback on your purchases then 0.5-1% afterwards, with no cap on cashback earned. You’ll have access to many retail and travel offers such as ‘Spend £100 or more on Selfridges, get £30 cashback’ – tempting!
This ‘cashback’ is then loaded back onto your card on the year anniversary of when you opened the card for you to use. As long as you can pay off your balance in full every month, you’re essentially saving on all your purchases! Now truth be told, I haven’t always paid off my balance in full every month and have incurred some interest over the year, your girl had some expensive months! But the good thing with AMEX is you have the freedom to pay off your balance over several months. You won’t incur any unwanted charges as long as you pay back the minimum amount which for me has never been more than £25 a month. The AMEX app is also super easy to use and manage.
Here are some of the other suggestions you might want to look into:
· British Airways AMEX Credit Card is ideal for the traveller! You can earn Avios points which then can be redeemed for flights, flight upgrades, hotels etc. You also have Purchase and Refund Protection. Another good one is Virgin Money Travel Credit Card which charges no fees for overseas use and offers 12-month interest-free introductory periods for purchases and balance transfers. You may also be entitled to discounts for Virgin Holidays and the offer of cashback on travel insurance!
· Aqua Advance Credit Card - This card is ideal for those with bad credit and want to improve their credit. Aqua is actually a Mastercard. Some places may not accept credit cards like AMEX but as Aqua is a Mastercard it can be accepted more widely. For those with bad credit, initially you might be given a high APR because of your history, but if you stay within your credit limit and make your minimum payments on time each month, then your rate could be reduced by 5% after 12 months and eventually be brought down to 19.9% APR, which is in line with the rate offered to those with good credit. They also offer access to their Aqua Credit Checker which gives you free unlimited access to your credit report, personalised tips on how to improve your credit score, weekly alerts and access to money-saving vouchers and offers.
· Supermarket-linked Credit Cards can be useful as they are associated with collecting points and rewards which you can redeem. Tesco Purchases Credit Card allows you to collect Clubcard points on purchases in Tesco and elsewhere and offers up to 20-month interest free period. Similarly, the Sainsbury’s Dual Offer, M&S Shopping Plus, and John Lewis Partnership Credit Cards also allow you to collect points when spending in the supermarket/retailers themselves or elsewhere.
Before you apply for a credit card, comparison websites are your BEST FRIEND. They can help find the right card for you. All you need to do is provide some personal details, your financial situation, and what you plan to use the card for, then they will do an Eligibility Check for you. Money Supermarket is my favourite - https://www.moneysupermarket.com/credit-cards/search/, but you can also use Money.co.uk, Which?, Compare the Market. With any of these cards, remember to read the T&Cs, what is advertised is not always what you think you’re getting!
Now we’re onto the good stuff, the use of Credit Cards carries many benefits.
· Credit cards are easy to use and can often be managed through a mobile app just like your ordinary online banking app. You can pay in and track your spending on the app, as well as view any offers.
· Build your credit score. This is probably one of the biggest benefits of credit cards. If your balances are paid in full every month, minimum payments are made on time and your credit utilisation ratio is low, this can improve your credit score massively – more on this later
· Buy now, pay later. If you need to make a major purchase now and you don’t have the money you need until your next payday, a credit card gives you some extra financial support, given that you can pay it back after payday. If you are willing to pay interest, then it can help you spread out the cost of large purchases.
· Protection against fraud. If it’s stolen and used fraudulently, you’re much more likely to get the money back. If your card is lost or stolen, you can call your bank to cancel it.
· Protection against companies going bust. For example, if you book a holiday and the provider goes out of business, the credit card company should cover the cost. Any purchases you make between £100 and £30,000 are protected by the Consumer Credit Agreement, which holds the credit card provider liable if anything goes wrong with your purchase.
· Freebies often come with credit cards such as reward points, vouchers and cashback.
Credit Cards can be pivotal in improving your credit score, here are some tips when using one:
· Keep your utilisation rate as low as 25-30% if you can, i.e. if your credit limit is £1000, try to only spend £300, pay that back, then spend again. This will improve your credit score massively as it will show lenders you are reliable with paying back and are not using too much credit.
· Increase your credit limit if you are confident and disciplined with money to improve your utilisation ratio i.e. if you have a balance of £800 on your card, increasing your limit from £2000 to £4000, will improve your ratio from 40% to 20%.
· Make the minimum payment each month. Set up a Direct Debit for the minimum payment, or for as much as you can afford to repay. This will mean you don’t miss a payment, which could lead to unwanted charges and damage to your credit score.
· Try to pay in full every month if you can, even if your provider is flexible, so you don’t pay interest on what you’ve borrowed. If your credit card provider requires you to pay in full, make sure you pay it on time, missed payments will affect your credit score.
· Don’t close credit accounts you’ve had for a long time, even if you don’t use it! Closing it will do you more harm than good. Keeping long-standing credit cards open shows stability and trustworthiness with lenders.
· Don’t open too many credit cards at a time. Try to find the right one for you before you apply. Having one or two credit accounts is fine.
· Link your subscriptions like Netflix and Spotify to your credit card and even use it for small purchases like transport and food and then pay it off every month. Of course, you can easily link subscriptions to your normal visa debit card but by linking it to your credit card, your subscriptions can help with improving your score and also you can get cashback on those purchases with cashback cards!
I know, information overload! But I hope this blog is a good starting place if you’re considering applying for a credit card. My advice is to do research, use comparison sites and most importantly, be responsible! It is important for anyone who decides to open a credit card to consider and plan ahead how they will pay it off.
Until next time, Aims x
“In the end, credit cards are like life: they are what you make of them.” - Laura M & Susan M