Many personal finance commentators will tell you to stay away from debt, in particular credit card debt. While this is true, in my opinion it is not the whole truth. That being said, if you already have credit card debt I would not get another credit card until you have paid off existing debts.
The overarching theme of this post is the responsible and sustainable use of credit cards. They should be a financial tool and not a burden. You should ideally pay off your credit card in full each month thereby avoiding the debt trap.
- Earn cashback and rewards
- Retailer discounts
- Consumer protection and Section 75
- Cheap spending abroad
- Build your credit score
Earn Cashback and Rewards
Some credit cards will pay you a set percentage of your purchases as cashback. This is great if you use a credit card strategically or for big one off purchases. However, make sure you pay off the card account balance in full each month otherwise the interest may outweigh the cashback you receive.
A great way to take advantage of cashback would be to pay regular bills such as your mobile phone or utilities and then set up a direct debt instruction to pay off the balance in full. Therefore, you won’t be charged for use of the credit card, but you will gain some cashback from your purchases. Additionally, if you have a large one off purchase, you could spend for example £1,500 and when your bill is calculated pay off the full amount from savings. If you received just 1% cashback that would be a gain of £15.
Many credit card providers will offer additional rewards for using your credit card. Instead of cash you may be able to accumulate points or vouchers which could then be spent. Some credit cards will offer air miles allowing you to accumulate points which will give you free or discounted flights.
Some credit card providers, especially banks, will offer additional cashback or rewards for using your credit card at selected retailers. For example, I have a Santander credit card which along with the cashback I can receive I also get retailer offers from Nando’s, Costa Coffee, Coop and Kindle, these retailers will give an additional cashback up to 20% of the purchase.
It is well worth keeping an eye on what retailer discounts come up as they often change each month. Now and then you might find that you could save a lot of money on a car hire, flights or on a hot chocolate you bought when in town shopping.
Consumer Protection (Section 75)
If you use your credit card to pay either partly or in full for goods or services costing between £100 or £30,000, you get valuable protection under Section 75 of the Consumer Credit Act.
“Under Section 75 of the Consumer Credit Act 1974, the credit card company is jointly and severally liable for any breach of contract or misrepresentation by the retailer or trader.”
Essentially, under Section 75 the credit card provider is jointly responsible as the retailer therefore allowing you to put in a claim to the card provider. So if you were to pay for a laptop and on receipt of this laptop you discovered it was faulty, you may want a refund from that seller. However, if the seller decides they don’t want to refund you for your faulty laptop, you could contact your credit card provider and claim the funds back under Section 75. The credit card provider would refund you the money and in turn claim back the money from the seller.
Alternatively, if the amount of the goods or services was less then £100 or more than £30,000 you could claim under the industry-agreed chargeback system. While this is not enshrined in law, many financial institutions are subscribed to it. It works by reversing the transaction by withdrawing the funds from the ‘retailers’ bank account and depositing it back into your account. Chargeback also applies to debit cards.
Cheap Spending Abroad
Most debit cards charge you foreign transaction fees for purchases abroad. This is also the same for most credit cards, however many will waive this fee for purchases made while overseas. Some credit cards have as part of their benefits fee-free spending while overseas. Others, such as my Nationwide credit card will allow you to build up fee-free spending limits the more you use the card.
This could make your holiday a lot cheaper when spending using your credit card. However, do not use the credit card to withdraw money from an ATM. This will still incur cash withdrawal charges and may affect your credit rating. If you want access to cash while on holiday, you could look into travel money cards from currency exchange providers who will provide a cash card which can be loaded and used to withdraw from an ATM.
Build your Credit Score
If you have never used credit, paid bills or had a mobile phone contract chances are you will have poor credit history. The reason for this is that financial institutions will use your credit report to assess your risk and therefore access to credit. Alternatively, if you have a poor history of using credit you will also struggle to get more credit.
A credit card could help either build or repair your credit rating. You can apply for a ‘credit builder’ card, this is a credit card for customers who have poor credit history and usually have low credit limits (around £200-£500). If you spend a little each month using the credit card and pay it off in full each month, after 6 months you will see your credit score start to improve; after a year you could completely change your credit report.
Note: make sure that you do pay off these cards in full each month as the interest rates charged are a lot higher than that of banks. Also don’t miss a payment as this will have a disastrously high impact on your credit score for up to 7 years.
For more useful tips on improving your credit score click here!
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None of the content in this article should be considered financial advice, I am not a financial advisor and you should always do your own research prior to investing. These are my opinions only.