What is a credit card and how to use them responsibly

• Credit card protection
• Your credit report and score
• Credit cards with rewards
• How to use your credit card
  - Try pay off your balance in full every month
  - Don't skip payments
  - Pick the right card for your lifestyle
  
  

So, with the risk of paying interest, you might ask, “Why bother with a credit card when I could just use my debit card?” Yet there are some key advantages to using a credit card:

Credit card protection

A significant advantage is the protection you get when you use your credit card to make purchases. Generally, credit card purchases over £100 and up to £30,000 are covered by ‘section 75’ of the Consumer Credit Act.

Section 75 covers you if a company has failed to supply the goods or services you bought or has provided goods not up to standard or faulty. Additionally, you’re covered if the company does not offer accurate information on what it’s supplying or what the product it is selling does. Section 75 applies to the UK or overseas purchases.

There are cases where Section 75 does not cover credit card purchases. For example, using a third party or an intermediary instead of buying directly from the supplier. Regardless, most agree Section 75 is more convenient and safer than chargeback schemes, which normally apply to debit and prepaid cards.

Your credit report and score

Your credit report affects your loan applications, and lenders will look at your credit file and score, especially when it comes to making larger purchases, such as a house, a car or business premises. Lenders use your score to predict how likely you are to pay them back. Using your credit card and paying off the balance on time is a way to build your credit rating: the better you are at paying the money back on time, the better your score will be.

Another advantage of building good credit is that the best interest rates are often reserved for those with the highest credit ratings So before you think about applying for a personal loan, for example, check your credit score to see if it is worth taking steps to improve your credit score first.

Credit cards with rewards

Unlike some debit cards, many credit card companies offer rewards in the form of cashback, discounts, or savings on travel. All of these benefits mean you can save money on future purchases; however, it is important to remember that no amount of rewards is worth not being able to pay off your balance.

The perks and rewards vary between card providers, so it is always worth looking around to find the best rewards for you. If you're looking for a new credit card provider, you our compare credit cards for free on our website, and there are no forms to fill in.

How to use your credit card

Now that you have a better understanding of what a credit card is and how they work, here are a few pointers on how you can get the best out of your credit card and avoid getting into debt:

Try pay off your balance in full every month

To avoid paying interest, you aim to pay your credit card bill in full. To do this, think about how much money you take home each month and make sure you're not charging more to your credit card than you have available after your monthly expenses. There are simple ways to make budgeting fun, and you may find it helpful to set a weekly budget and monitor your spending regularly.

Don't skip payments

Having a large credit card balance is never advisable, but if you do find yourself with one, skipping payment is not the best way to deal with it. Missed payments will hurt your credit score significantly. At least try to make the minimum payments and increase the payment the following month.It may be better not using your credit card until it has been paid off, rather than try to pay off the debt as it continues to grow.

Another option might be to consider a zero balance transfer credit card. These cards offer reduced or zero interest rates for the first 6 months, a year or more By transferring your balance, you can stop the debt from gathering any further interest for a specified time. This allows you to pay back what you owe quickly and with less pressure. However, you may be charged a fee for transfer service, normally based on the amount you owe.

If you struggle to control spending or rely heavily on your credit card, consider looking at alternative options to help you budget. For example, prepaid cards differ from credit cards in that you have to top up your prepaid card with money. Once you have used up the money, there is no overdraft or option to borrow money.

Pick the right card for your lifestyle

As previously mentioned, some cards offer rewards and cashback. It's worth looking around for the best card for you as some focus more on cashback, while some focus more on rewards (travel miles, cheaper healthcare, warranty doubling etc). If you're a regular clothes shopper, then you may find it more useful to go with the cashback cards, whereas if you're a regular traveller, you may get more benefits out of travel cards. It's all about finding the right card for you, which is going to give you the type of perks you're likely to use.

Conclusion

Credit cards can be useful and offer benefits. For example, Section 75 provides a level of protection on purchases not available on debit cards or prepaid cards. As long as you don’t miss payments, credit cards can help build your credit score and show lenders you pay back on time.

But, it is also important not to be heavily reliant on your credit card, or any form of credit for that matter. There are also interest charges to consider when you cannot pay your balance in full. Interest charges plus frequent use can cause debt to spiral out of control.

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