What are the advantages and disadvantages of credit cards?

Credit cards are one of the most commonly used forms of short term finance in the UK.  In this article I look at the pros and cons of using them.  Because they are relatively easy to obtain, their risks are quite large because the ability to pile on large amounts of debt is always there.

In many cases, people with poor credit ratings aren't able to take out credit cards which honestly is a good thing for people who don't have a good track record of managing money well.

If you use your card correctly you could receive extra protection on your purchases with the chance of reward points or even cash back when you use your card.  But using your card irresponsibly could lead to you paying lots of interest and getting yourself into debt which you could struggle to pay off.

Pros of Credit Cards

The pros of credit cards are that they are quick to borrow money from, for example if you did want to purchase something and you didn’t have all the funds available, your credit card would be ideal in this situation. 

You wouldn’t need to have the full amount in your bank account ready to repay straight away; you would be able to repay the cost over a number of months with your credit card and you can also shop online and use your card all around the world safely and securely.

Another benefit of credit cards is the consumer protection which you will not receive with a debit card, cash or cheque.  For example if the company you purchase from goes into administration or the purchase doesn’t turn up, you are able to claim your money back through a credit card.

Depending on the card you apply for, some may offer a 0% period which means you can effectively benefit from an interest-free loan. When the interest rates are like this you will need to have paid the balance off in full before the offer ends or you will be charged interest.  The usual interest rate for most credit cards would be around 18% which can work out quite expensive, which is why you should pay off your debt before the interest kicks in.

Some may not need to extend the interest free period, providing you pay your credit card bill in full each month you are still eligible to borrow for ‘free’.  You will also get protection if your card details are used in a fraud transaction, your provider should repay the money following an investigation.

If you owe money on a store card or another credit card, taking out a new card could benefit you.  You will more than likely be paying a higher interest rate and could cut this to 0% (if your credit card is 0%) by transferring your store card balance over to your credit card. You will usually have to pay a transfer fee of around 3% but this will work out cheaper than having to pay your 18% for the run of the debt.

Cons of credit cards

When applying for a credit card you must remember that it still is a form of borrowing, even if it is 0%.  The buy now pay later mentality could potentially put borrowers at risk.  It is important to keep up with monthly payments as failing to do so could lead to your debts spiraling out of control, especially if you only pay the minimum monthly payment each month.  

If possible it is wise to pay back as much as you can monthly to try and clear your debt as quickly as you can and think of a credit card as a short term borrowing facility.

When applying for a credit card it is not only the interest rate you will be paying for, you will be charged if you are late with your payments or miss them completely.  It is recommended to always pay your bill on time and not to exceed your credit limit, as this could lead to you paying a penalty.  Your credit record will also be affected adversely if you pay late.

Avoid withdrawing cash from the ATM too as most firms will charge around 2% and you are likely to start being charged interest immediately, as there is no interest free period on cash withdrawals.

When choosing the best for card for you, you must evaluate what it is you need the card for.  If you have an expensive period coming up, whether you are planning a wedding or are moving properties you will need a 0% purchase card.  

If you have debt problems a 0% balance transfer offer is something that would be recommended. Use a comparison site to find the best deal, there are plenty out there.