How to use a credit card (responsibly) 💳

Maintaining good credit is key to healthy personal finance. It helps you access loans, mortgages and even phone contracts.

There are many ways to improve your credit score, but using a credit card is a good entry point, allowing you to improve your score every time you pay for your purchases on time.

When used responsibly, a credit card can come with benefits like air miles, insurance and cashback or 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.

Your monthly statement shows your outstanding balance, the minimum payment required, the payment due date, and any interest charges accrued.

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, and each credit card will be slightly different, but some potential benefits to consider 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, though sometimes this may be restricted to certain retailers.
• 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 (which can be worth it if you travel a lot).
• For general rewards and perks
  As well as cashback, rewards credit cards offer vouchers and goodies when you use them 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. It might be enticing to max out your card... but it's important to remember that you will have to pay this money back. So only spend what you would if you were using money straight from your bank account, or what you know you can afford to repay at the end of the month.
• Avoid cash withdrawals
  It's better to use your credit card to pay with directly, rather than making cash withdrawals. 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
  Making your monthly payments on time is the key to responsible credit card use. The main way that credit cards improve your credit score is by demonstrating to lenders that you repay 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 your bill in full
  If you only make the minimum payment amount each month, the interest charged can quickly accumulate and make your purchase more expensive over time.
• Check your bill carefully
  Make sure to thoroughly read your bill each month to ensure you recognise everything on your statement, and flag any suspicious entries to your credit card provider asap.
• Read all terms & 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!

By following these tips for responsible credit card use, you can avoid credit card debt traps whilst nurturing your credit score and reaping the benefits 🌱

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