In general, credit cards are similar to taking out a personal loan, as you are in essence loaning money that you have to pay back. Credit cards may offer more freedom to the user than a loan as they can be used for balance transfers and cash advances as well as for spending, but naturally they require more responsibility.
Credit cards come with their own finance charges, penalties for missing payments and interest rates. Whilst it is possible to avoid any interest – and thus have a credit card for free – you need to keep up with your payments every month to achieve this.
Sit back, relax and prepare to take in the Guru’s wisdom on credit card matters…
Popular reasons for taking out a credit card
Credit cards are popular for a whole host of reasons. Some people like to have the peace of mind that they have an emergency source of finance on them at all times. Others like having the option to make advance purchases and not being tied down to payday.
Cards are also popular for their security cover – lose cash and there’s no getting it back, whereas cards tend to come with built-in protection from theft or fraud payments. Some cards also come with perks – incentives to make money whilst you spend.
Benefits of a credit card
- Spreading the cost
- Built-in protection
When it comes to emergencies, the convenience of having the credit there and then is second to none.
Spreading the cost
When paying back credit owed, you can spread the cost, and usually at a rate that works for you. This will generally include interest, but if you’ve had a big outgoing, you will have other options beyond simply paying off the lump sum spent in one go.
Most cards come with built-in protection, protecting you against fraud, in the event of your card being stolen. Some cards will also protect purchases over a certain amount, so if you’ve paid for a new sofa, only to find the sofa company goes bust prior to delivery, you’ll likely be able to claim the money back.
Risks of a credit card
Like dogs, cats and pet tarantulas, credit cards need careful management from their owners. Failing to be financially astute when using a card can leave you in debt; debt that accumulates further interest every month and can quickly spiral into something unmanageable.
Be aware of the risks involved with any credit card and you’ll have a far greater chance of avoiding unwanted debt.
- Can affect credit scores
Every card comes with its own charges. Ensure you understand all the terms and conditions of your chosen card to avoid any financial surprises further down the line.
The temptation of having credit ‘on tick’ is too much for many. If you’re the kind of person who spends money the moment you have it, a credit card may be just too appealing, and for you, too much of a financial risk.
As with credit card charges, be sure to know your interest rates prior to taking on any card. Be aware also that lenders can change their interest rates at short notice, although they must notify you in writing first. Make sure any correspondence from your credit card company is read and absorbed the moment it arrives.
Can affect credit scores
Running into debt on a credit card can affect your credit rating, affecting your financial future until you can prove to lenders how financially responsible you are.
Alternatives to a credit card
Credit cards aren’t suitable for everyone. If you’ve hit an emergency situation and need credit fast, be sure to consider all of your options before committing to a credit card. There may be another solution that will benefit you more financially.
- Personal loans
- Prepaid cards
- Debit card
As with a credit card, the personal loans you’ll be eligible for will depend upon your own financial circumstances. The better your credit score, the better deals you may be able to secure. If you’re unsure on whether a credit card or loan is for you, it’s worth looking into both, seeing which you are offered and then comparing interest rates.
Prepaid cards are ideal for those who may be tempted to stretch their credit card budget, as they come with a top limit on spending. Once that limit is reached, you’re unable to spend any more. As with all cards, be sure to make yourself aware of any charges applied. Different cards come with different charges, applied to anything from cash withdrawal to fees for not using the card a certain number of times.
If your credit problems are likely to be short-term or a one-off, an arranged overdraft with your bank may be a better solution than a credit card. Be sure to make this ‘official’ with your bank though. Even arranged overdrafts usually carry interest fees, but they are considerably less than fees accrued when going overdrawn without notifying your bank first.
The most obvious alternative to a credit card, a debit card allows you to only spend the money you have. Thus, it’s harder to run up the kind of debt possible on a credit card through a debit card. On the other hand, if it’s credit you’re after, a debit card will not offer you that.