The ‘c’ word (credit 👀), you either love building it up or hate the hassle, but maintaining good credit is key to healthy personal finance. It helps you access loans, mortgages and even phone contracts 🌱

There are a million and one ways to improve your credit score, but using a credit card is a good entry point, allowing you to improve your score on everyday purchases.

When used responsibly, a credit card can come with possibilities, such as air miles and insurance, and a mountain of perks such as cashback and vouchers.

How credit cards work

Before you decide to get a credit card, it is important to understand how they actually work as this will help you use them responsibly.

Credit cards allow you to buy things in the same way you would with a debit card, except you’re using money temporarily borrowed from the credit card provider instead of dipping into your own stash.

Your card comes with a pre-approved credit limit, which is the maximum amount of money you can spend until the balance is paid back.

Each month you receive a statement which details your outstanding balance, the minimum payment required, the payment due date, and details of any interest charges.

If you choose to pay off your balance in full you’re usually allowed a certain grace period, during which you can pay back the outstanding balance without any extra interest being added. However, if you decide to only pay the minimum amount you will usually be charged interest on what you owe.

Reasons to get a credit card

There are many reasons for getting a credit card, but it’s important to choose one that fits in with your personal goals. Different credit cards are geared towards different aims, some of the most common reasons and uses are:

  • For building credit 📈
    Websites such as Experian and Equifax create a credit score for you which lenders, phone companies, car shops etc. use to determine if you will reliably make your payments. Credit report sites use your credit and payment history to give you a credit rating, which you can improve by making even small payments on a credit card. This shows your ability to pay back debts on time.

  • For consumer protection 💳
    If you use your credit card to buy something and it is faulty, it doesn’t arrive, or in the case of an experience, it doesn’t happen, you may be more likely to get your money back if you made the initial purchase using a credit card. This extra layer of consumer protection was extremely helpful during the coronavirus pandemic.
  • For earning cashback 💰
    Cashback credit cards reward you with an agreed percentage of what you spend on the card.
  • For travel insurance and frequent flyer miles ✈️
    Travel insurance and frequent flyer miles are more likely to be included with credit cards that charge a premium, however this premium may be worth the cost if you travel a lot.
  • For general rewards and perks 🎁
    As well as cashback, rewards credit cards offer vouchers and goodies when you use it to purchase items.
  • For a better rate of interest 🎉
    If you take out a new balance transfer credit card, you may be allowed to move your outstanding balance from your existing one in order to secure a better interest rate or other perks, such as store loyalty points and vouchers.

How to use a credit card responsibly

The benefits of using a credit card only outweigh the disadvantages when they are used responsibly. By following our steps you will be able to avoid most major pitfalls and reap the advantages, no strings attached.

  • Don’t overspend
    When you apply for a credit card, you are also given a credit limit. Although it may be enticing to spend your entire credit card balance and max out your card, it is important to remember that you will have to pay this back. A useful tip is to only spend what you would usually be able to afford if you were using the funds from your bank account, or what you can actually afford to pay back at the end of the month.
  • Avoid cash withdrawals
    When using your credit card it is better to pay with your card, rather than making a cash withdrawal. Withdrawing money with your credit card incurs high daily interest charges, a cash advance fee and can negatively affect your credit score.
  • Pay your bill on time
    This may seem like an obvious piece of advice, but making your monthly payments on time is key to responsible credit card use. The main way that credit cards improve your credit score is by demonstrating to lenders that you pay back the money you are lent on time. If you pay your credit card bill late then it has precisely the opposite effect, appearing on your credit history, and negatively impacting your credit rating.
  • Pay back more than the recommended minimum payment
    If you were to only make the minimum payment each month the interest charged can quickly accumulate and make your purchase more expensive over time.
  • Check your bill thoroughly
    Make sure to read through your bill each month to make sure that everything that is on your statement, you bought and so you can raise any suspicious entries.
  • Read all terms and conditions
    This nugget of wisdom applies to any financial product. Make sure you read all the terms so you know exactly what fees you may have to pay, how your credit card payment works, what the interest charges are... and a whole lot more too.

By following these six tips for responsible credit card use, you can avoid credit card debt traps whilst nurturing your personal finance and enjoying all the benefits 🌱

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