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Pros and cons of using a credit card

Advantages to using a credit card:

Credit cards are one of the most popular financing methods, and with good reason. There are numerous benefits to using credit card, but they are not without their fair share of drawbacks, too. Let’s first look at the pros of having a credit card, and then see what you should be careful of.

Their major advantage is that they offer a flexible means of financing. Having a credit card means that you can essentially borrow money easily, without having to go to the hassle involved with applying for a loan. This financing can also be cheaper than borrowing money conventionally, in that most cards offer an interest-free period in which you can clear the debt owed without having to pay fees on what you borrowed. This offers a cheaper way to borrow money short-term as long as you clear the balance within the specified period (usually one month).

So credit cards are a great way to finance short-term purchases without incurring extra costs, giving you an extra degree of financial flexibility. They are also simply convenient. If you don’t have cash to hand or don’t like to carry too much cash, credit cards offer a great way to make purchases on the go.

Many benefits that apply to a particular card won’t for another, so it’s important to be informed of the possibilities when looking for one that suits you. For example, some credit cards are designed with travel in mind, that have much lower foreign currency usage fees (and may offer perks such as air-miles).

More generally though, the terms and conditions for each card vary widely, and can suit a specific purpose in mind. For example, in order to lessen the financial burden of making a big purchase, some cards don’t have charges for purchases which allows you to spread the cost over a longer time-frame.

Other cards can be a good solution for sorting out debt; a 0% balance transfer card for instance. These cards allow transferral of debts built up on another card for an upfront fee which is put on your balance with the debt of the other card. This might not sound that useful, but in the event that you have built up a debt on another card that charges high interest racking up further debt, a balance transfer to a new card can save you a lot in the long run.

Other cards offer significant benefits for spending. One example would be a cashback card, with which you can essentially earn money while you spend (often around 3% per purchase). This can be great if debt isn’t a concern, and you can choose for a card that gives good rewards like this without thinking about the interest rate if you always clear your balance monthly.

Whatever type of card you choose for, one of the main benefits offered by all credit cards is payment protection. Under Section 75 of the Consumer Credit Act, if any purchase between £100 and £30,000 is made in whole or in part with a credit card and the goods or services turn out to be unsatisfactory (or not what was advertised), you can ask for the money back from your card provider (who will then try to get a refund from the supplier of the goods or services). This protection applies even if the seller has gone out of business or is not responding to communication. Note that this Section doesn’t apply with charge cards, however.

Drawback associated with credit cards:

The main pitfall to avoid with credit cards is high interest. In many cases as high as 18%, these interest fees are incurred when you don’t clear the balance on the card in a set time, usually monthly (or 59 days, meaning the debt shouldn’t go into 2 monthly cycles). This interest can start to rack up, so credit cards should only be used for short-term financing. It isn’t good to think about them as a source of long-term lending. Most providers also charge extra fees on top of interest for missed payments.

Another consideration is getting the card in the first place. Your credit score might be an obstacle in this regard, and your application may be turned down. A “credit builder card” can be a good option here, since it allow you to increase your credit score. They have high interest rates but can be worth it if they help you pass future credit checks.

When looking for a credit card, you also need to keep in mind that the interest rate used (the Annual Percentage Rate – commonly referred to as the APR) may not be the same in practice as what was mentioned in advertising. The representative APR is what the company must charge to the majority (51%) of customers, which they must display on advertising. This means that in practice, nearly half of all customers could be charged a higher rate. This decision is made based on the applicant’s credit rating.

Summing up

Overall, credit cards are an excellent option for a variety of situations. If you’re looking for a more convenient way to shop (particularly online), want to spread the cost of a big purchase over a slightly longer time-frame, or clear debt on another card, the having a look at the options out there is a great idea. They can also offer other benefits such as payment protection, travel perks, and even allow you to earn while you spend in the case of cash back cards.

But at the same time, it’s important to keep in mind the application process, the risk of high interest rates, and unexpected charges and fees. Doing the right research can help to choose the right card and get the most from what is a potentially useful financing option.