The unsung benefits of using a credit card
Credit cards are no longer a must-have for aspirational twenty and thirtysomethings. These days you can use your debit card pretty much anywhere, without fear of getting into problem debt. Nevertheless, credit cards have important benefits that might not be obvious. It is widely understood that if you clear your balance every month you can borrow money on plastic for free. What is less intuitive is that spending on a credit card can help you to secure the best mortgage rates, cut your grocery bill or bag free flights to exotic destinations.
Here are five key perks, highlighted by David Mann, head of money at uSwitch.com, the comparison website.
Unlike debit cards, if a credit card is stolen and used, the money does not come out of your current account straight away. This better protects your cash from thieves and gives you more time to resolve the issue with your bank. Significantly, credit card purchases from £100 to £30,000 are protected by Section 75 of the Consumer Credit Act. This means that the card provider is jointly liable if, for example, you buy something from overseas that never arrives, buy flights from an airline that goes bust or purchase a faulty fridge from a shop. For anything under £100 you can try a “chargeback” request for a disputed payment, but the card company is not legally liable.
Many credit cards let you earn rewards for every pound you spend. You could earn air miles or hotel stays, or cashback at big retailers. Mr Mann says: “The British Airways American Express Premium Plus Card charges a yearly £150 fee, but you can earn up to 3 Avios [points] per £1 spent with British Airways or BA Holidays and you’ll get 25,000 Avios for signing up. You can exchange 15,000 Avios for a return flight from London to Rome, or 20,000 for London to Moscow. For everyday spending, you could check out the Sainsbury’s Bank Nectar card. There is no fee and you earn double Nectar points each time you use it pay for your groceries in Sainsbury’s.”
■ A safety net
Credit cards allow you to carry a balance. This means that if you have an unexpected expense one month or need to make a big purchase — for example, paying for household repairs or a new washing machine — you can pay on your credit card and then pay it off over time without taking out additional loans. If this is your main reason for getting a credit card, a low-rate one might be a good fit if you don’t want the hassle of regular balance transfers. Low-rate cards don’t offer a 0 per cent introductory offer for transfers but have a lower standard interest rate, or APR, than other cards. One of the market-leading cards is the Lloyds Bank Platinum Low Rate Card, which offers a standard rate of 6.4 per cent on all purchases.
■ Credit history
Credit cards can also help people to build and improve their credit history. Although it may seem counterintuitive, taking out a card shows that you can not only obtain credit but also manage it and make repayments as required. This can help when you later apply for a mortgage or even if you want to switch energy supplier or get a new phone contract. Mr Mann says: “You don’t want to overdo it, but having a card or two that you regularly use and make all payments on when due will help build your credit history and raise your credit score. Ultimately, you will have a better chance of getting approved for those headline mortgage rates that you read about.”
He adds: “If you have a limited or poor credit history, consider credit-builder cards. These won’t give you a huge limit or the best interest rates but will help you start to build the history that will ultimately give you access to the best deals. An example is the Aqua Classic 29 credit card. It has no annual fee and you can get a credit limit of up to £1,200. The interest rate is 29.7 per cent, one of the lowest.”
■ Breathing space
High in popularity are balance transfer cards, which allow you to pay no interest at all on debts already built on other cards for up to 35 months. To keep the 0 per cent rate and avoid penalties, you still need to pay the minimum monthly repayments, however. Transferring debt to one of these deals costs a one-off fee, typically 2 or 3 per cent of the total. Mr Mann says: “The big danger is that you don’t save properly and fail to pay off the card at the end of your balance transfer period, which will leave you with debt and damage your credit file, but if you’re confident of your saving strategy and need breathing space, balance transfer cards can be a life-saver.”
You may also be able to switch debt to another 0 per cent card before the cut-off. The Barclaycard Platinum Card offers the longest 0 per cent balance transfer period of 35 months.
The rules of the card game
● Pay off your balance in full every month where possible. Otherwise at least make the minimum payment.
● Check any card fees and work out whether the benefits are likely to significantly outweigh the costs.
● Balance transfer cards don’t offer the best rates for new spending and the 0 per cent on transfers does not apply to new purchases.
● Don’t take on new cards if you have problem debt. Charities such as StepChange.org can help you.