Introduction to Credit Cards

It’s easy to shy away from using credit cards, especially when our economy seems like it is always on the rise. At every turn there’s a horror story about falling into debt and not being able to pay it off. However, over the past decade there has been a very large rise in credit card transactions.

According to the UK Card Association Report 2014, the UK has the biggest card payment market in the EU, accounting for more than 30% of all EU card spending, and 73% of the EU credit card market. Perhaps surprisingly more than 80% of credit card spending is paid off in full without incurring interest each month (UK cards Association Card Payment summary 2015). Those customers who pay off their balances in full each month continue to drive the growth in spending.

A credit card is a payment card issued to users (cardholders) as a method of payment, allowing the cardholder to pay for goods and services based upon a previous agreement with their lender.

Contrary to popular belief, if you can use a credit card responsibly, you’re actually much better off paying with credit than with debit.

Sign up bonuses: The standard debit card offers zero or very small rewards. However, many credit cards offer significant rewards when used responsibly, such as points that can be redeemed for things like gift cards or air travel.

Cash back: Depending on which credit card you sign up for, you could earn anywhere from 0.25-5% back on your purchases.

Frequent Flyer Miles:It almost seems that every airline has at least one credit card available. Cardholders can rack up these miles at a rate of 1 mile per pound spent. The price of the plane ticket you ultimately end up redeeming your miles for will determine how valuable this credit card reward is, but many frequent flyer cards are made immensely more valuable by their mileage bonuses.

Grace period: When you purchase something using your debit card, your money is instantly taken. When you make a purchase with a credit card, your money remains in your current account until you pay your credit card bill.

Consumer Protection: Paying with credit cards gives you greater protection than paying with debit, cash or even by cheque. Under Section 75 of the Consumer Credit Act, as long as the item or service you bought cost between £100 and £30,000 you can make a claim. This right is particularly useful if the retailer or trader has gone bust, or fails to respond to any correspondence with you.

Universal Acceptance: Credit cards are more likely to be accepted internationally than charge or prepaid cards, making them easy to carry and use abroad.

Building Credit: Finally, credit cards are the only method that can help you build credit, providing much-needed evidence that you can borrow money and pay it back on time. This is especially beneficial when it comes to applying for financial aid further down the line, such as your first mortgage.

Despite all the benefits and advantages of taking out and using a credit card, it is important to remember that a credit card is still a form of borrowing and there are always risks.

Beware the debt trap: Essentially, credit cards give the flexibility of buying now and paying later. However, if you don’t pay off your balance in full each month it becomes much harder to repay it, and this can take a considerable amount of time.

High interest payments: Exceeding your credit limit or missing a credit card payment could incur you high interest rates. Also, using your credit card to withdraw cash will always attract interest charges, increasing the possibility of debt as soon as money is withdrawn.

Additional / Hidden fees: When people sign up for a credit card, most usually won’t read the full terms and conditions. By law in the UK, credit card companies are obliged to highlight key features of their terms and conditions, such as the APR.

Although credit cards can be complicated, any cardholder who has sufficient discipline to use the card properly can find it a very helpful tool that can even help reduce monthly spending. Nevertheless, to avoid nasty surprises, it is worthwhile to know the rules, and to keep important contact details of your lender in an easy and accessible place