We totally understand why credit cards can be a scary concept. Spending money you don’t have to pay right now might make you worry how ‘future you’ will be impacted. But actually credit cards can be a really good tool for managing your finances if used correctly and we’re about to tell you why!
This blog is in collaboration with MoneySuperMarket who can help you learn more about credit cards and find the right credit card for you.
Firstly, let’s look at how credit cards work
A credit card lets you borrow money from a bank, building society or another lender to buy things up front, which you then need to pay back at a later date or over a longer period of time. The best way of thinking about it is like a short-term loan. Depending on the credit card, you may have to pay interest on top or providing that you pay it off by the date given to you, you may not be charged any interest. A credit card has two parts to it, a credit limit, which is how much you can spend on the card plus APR which is the rate of interest they charge.
Here are the top 5 reasons for why a credit card could be a good financial tool for you:
1. They are one of the best ways to build your credit score
If you’re looking to buy a house or take out a loan in the future then one of the ways that the bank will decide how much to lend to you will be by taking a look at your credit score.
We’re all about dispelling myths at Talk Twenties and the myth that ‘credit cards harm your credit rating’ is one we’d like to put in the bin. It’s all about how you use your credit card. Take a look at these different scenarios…
You are out to dinner with a friend that you know well, it comes to paying the bill and she says she’s forgotten her purse. Your friend does this all the time but she will always pay you back within good time. Would you lend to her?
Again, you are out to dinner with different a friend that you know well, it comes to paying the bill and he says he’s forgotten his wallet. Your friend does this all the time and he hardly ever pays you back, or if he does it will only be in small amounts… Would you lend to him?
You are out to dinner with a group of friends and one of the people you don’t know very well forgets their card. You have never met them before and have no idea whether you’d get the money back… Would you lend to them?
Scenario 1 is an example of someone with a good credit rating, they borrow money a lot but they always pay it back in time. Scenario 2 is an example of someone with a bad credit rating, they frequently forget to pay you back and as a result it makes you not want to lend to them. Lastly, Scenario 3 is an example of someone with no credit rating, you have no idea if they would be good or bad at paying you back so you proceed with caution and maybe only lend them a small amount to begin with if you lend to them at all.
Ideally you want to be the person in Scenario 1, the banks know they can lend money to you and that you’ll repay it on time. A credit card is one of the best ways to build up your credit rating so when it comes to wanting to borrow money for a house or a loan the banks will know to trust you.
2. They are an affordable way to borrow money in the short-term
Managing your cashflow can sometimes be tricky, especially when you’ve just started earning in your first job after school or university or you’ve had an expensive few months and then a big bill comes up that you weren’t expecting. Credit cards are an affordable way to borrow money that you might not have right now but will have in the near future. However, it’s important to remember that you must be able to afford to make the repayments and to only borrow what you can afford.
3. There are lots of different types of credit cards
Just like our lifestyles, credit cards come in all shapes and sizes. It’s important to find the right fit for you, it’s quick and easy to do on the MoneySuperMarket website.
Balance Transfer Credit Card – Lets you transfer balances from other cards, for lower interest.
Credit-builder Credit Card – Helps you build your credit score with careful spending.
Rewards Credit Card – Awards you loyalty points or AirMiles with every purchase.
Money Transfer Credit Card – Lets you consolidate other debts for better interest.
Purchase Credit Card – Gives you low or 0% interest on what you buy for a variable period.
Cashback Credit Card – Gives you a percentage back on certain purchases.
Travel Credit Card – Makes spending abroad easier with lower fees and exchange rates.
4. Credit cards can protect your payments over £100
Did you know that if you use your credit card to buy something, including a holiday, that costs over £100 and up to £30,000, you’re covered by ‘Section 75’ of the Consumer Credit Act?
This means the credit card company has equal responsibility (or ‘liability’) with the seller if there’s a problem with the things you’ve bought or the company you’ve bought them from fails. You can read more about the Consumer Credit Act here. Debit card payments and purchases are unfortunately not covered by section 75 of the Consumer Credit Act so this is why lots of people choose to book holidays and purchase bigger items with a credit card.
5. You can get rewards for spending
Lastly, if you’re debt-free and pay off your credit card every month, some credit cards allow you to earn rewards for spending, either in pure cashback or in points that you can then convert into vouchers for shops, airlines, hotels and more.
You should only think about getting a reward credit card if you pay off your credit card in-full every month as they often have high-interest rates if you don’t make your repayments. If you have any debts you should think about paying these off first before considering a rewards credit card.
How to use a credit card without getting in to debt
We’ve just discussed 5 reasons why credit cards shouldn’t be as scary as you once thought but there are some important things to remember to be responsible when it comes to using credit cards.
Only spend within your means
It’s important that you don’t overspend on your credit card and only make purchases that you know you’ll be able to pay back when the bill comes through.
Pay your credit card bill in full every month
Paying off your credit card in-full is really important as this means you often will encounter very little or no interest for doing so plus it will boost your credit score and make future borrowing even easier.
Keep an emergency fund
Sometimes we all have little finance wobbles like an expensive unexpected bill here or there. One of the best ways to live worry free is to have an emergency fund ready. An emergency fund is a pot of money that you keep separately from everything else and is there to help you out of any financial struggles. You should aim to have between 3-6 months worth of your salary should anything drastic happen.
Wondering if a credit card would be right for you?
Head over to the MoneySuperMarket website and check out their eligibility search for more information on credit cards.
Blog post shared as part of a paid collaboration with MoneySuperMarket.
Read more about looking after your finances in your twenties on our Finance & Money hub.