Today I want to share a story of how I got my first credit card. I was fresh out of uni and was looking for a credit card due to the perks that these offer. It was much later that I actually learned all the rules of the game when it comes to credit cards.
I will share my personal experience when it comes to credit cards below. For those of you who have looked into credit cards you might know a lot of this already. Some of the benefits are more obvious than others. There are however risks to bear in mind as well.
benefits of having a credit card
This was actually what got me into getting a credit card in the first place. I wanted to get the rewards that come with credit cards. Since bank was using my money while it was stored on my current account, I thought it would only be fair for me to get some benefits back.
The options I had to choose from were – loyalty points, air miles or cashback. I did my homework by looking through what was the best option for me to go for. Cashback was the most tempting however entry cards offer tiny percent. Air miles wasn’t an option as I rarely used airlines where you could redeem these.
The option remaining for me was the loyalty points card. It offered the best cash equivalent rewards. I could easily exchange these points for cash vouchers to be used in popular high street stores.
Over time as my credit score got better I managed to get a better credit card. I opted for a cashback card that gives me even better returns. However, it’s thanks to my first card that I was even able to get this.
Some other benefits that credit card providers advertise are – travel insurance, purchase insurance, added safety when it comes to fraud and many others. You should check with your current or potential credit card supplier to get a full list of benefits.
There are also other types of credit cards available. Some make it cheaper to purchase expensive items. Others help you consolidate your dept to make it cheaper for you to clear this. There are also credit building cards to consider here.
These types of cards would need a separate blog to make sure I can cover and explain in enough details. These cards can be really powerful if used correctly.
are there more benefits to a credit card?
One of the biggest benefits that you are actually getting is an opportunity to improve your credit score. This is something that could be worth thousands of pounds when looking over long term.
If you want to learn more about credit scores than you should read this. There are some examples of what a good credit score can save you when it comes to large items like cars or a property.
The above however will only be the case if you stick with repaying everything that you borrow every month. Unfortunately, if you leave any credit unpaid this will actually drag your credit score down. This should definitely be your top priority.
It is also worth mentioning that you shouldn’t use more than 25-30% of your credit limit. This will make sure that you are maximising the credit score benefit you are getting.
potential watch outs
As mentioned above, it can actually adversely affect your credit score. You need to be confident that you are able to keep up with payments of what you spent.
On top of this, all the benefits like air miles and cashbacks can be taken away from you if you don’t pay on time. This is something that most (if not all) credit cards have in their T&Cs in the small print.
Further to that, if you don’t repay back on time you will be charged interest. Interest is the way credit card companies make their money. These excessive interest charges are how they are able to offer all of the above benefits.
Currently, in the UK, on average the credit cards charge between 18% and 20%. If you have a limit of £5,000 on your credit card, you max this out and not pay it back in your next payment cycle – left for a year it can end up costing you nearly £1,000 in interest.
Not only you will owe a lot of money but also harm your credit score. It is also worth keeping in mind that some credit cards have interest rates that are significantly higher than the averages mentioned above.
The one exception to the above is 0% purchase cards. These allow you to buy an expensive item and spread the cost of it over certain number of months. You won’t be charged any interest for a period of time as well as this won’t harm your credit score.
The key with the above is to pay off the amount you owe before the end of 0% period as this will start costing you a lot all of a sudden.
summary
This was a quick overview of what credit cards are. There are more different credit card types that I will cover separately.
The credit card can be a great tool for you to build your credit score while also getting some benefits on the way. If used correctly not only you will get treats in the short terms but also long terms benefits through having a better credit score.
The biggest watch out however is the potential risks and costs that come associated with credit cards. I would suggest only getting a credit card if you are confident you can keep up with the repayments. Alternatively, credit card can quickly become the biggest enemy of your personal finance.
Pingback: What credit card is the best for me? - Money Hacks