why having credit card is important?

Wouldn’t it be amazing if there was a way for you to take someone else money and use that for a period of time and give it back without having to pay a penny for it? On top of that – getting rewards for doing so. Oh, wait… that’s literally what credit card allows you to do.

Having and using a credit card for your day to day expenses can be a smart idea from many different points of view. It is potentially scary when you look at the interest rates that you see advertised on credit cards. The reality however – you only pay this if you miss your payments on time.

However if you pay the money you owe on the dot – the credit card provider can actually reward you for using their money.

I will have a look into all the key pros and cons of having a credit card below. At the end of the day – you are the one to decide what is right for you.

credit card helps to build credit history

One of the biggest benefits credit cards give you – credit history! This is something that you will find hard to measure. And definitely won’t feel in your pocket… at least you wouldn’t know you can actually do.

Credit card will be a big contributor towards your credit history. This can make a sizeable difference to the rate you get on your borrowing. The borrowings I am talking about are things like mortgages, car finance or personal loan. 

Lenders always look at your credit score to make sure you are trustworthy. The better the credit score – the better the interest rates you get. The key to maintaining your score in good shape – don’t spend over 25-30% of your available credit limit.

For example, let’s have a look at a car finance. Let’s imagine you are looking to buy a car worth £10,000. You will look to repay it over 5 years. The difference between an excellent credit score and an average one can be dramatic. The result will be one person paying 5% interest while the other has to splash out 9%.

It might surprise you how much more expensive that £10k car would become. The first person will pay back just under £11,300. The second will have to return nearly £12,400. The interest you might pay is nearly double!

This is a great example of how you would be able to feel the difference of having a good credit score in your pocket.This difference results in you losing nearly £20 every months due to bad credit score.

The difference is even worse if you think of buying a home. The same credit score difference will cost someone tens of thousands of pounds if you look at a mortgage over 20-30 year period.

you can get rewarded for using a credit card

The above should be an incentive big enough for anyone to get a credit card. If for one reason or another it doesn’t get your blood pumping – there is more.

Many credit cards offer a range of benefits that you get for spending their money. There are cards that offer air miles that you can get free flight for. Other cards give you either loyalty points or cash back.

This is actually crazy – you get to earn cash back for using someone else’s money. You can learn about different types of credit cards here.

On top of this, some cards offer you one time bonuses for when you sign up. As well as on top of the bonuses you get for spending – you can get promotional bonus. These can be something like – spend a certain amount at a certain grocery retailer.

The above is why I love my American Express. They offered a 5% cash back for when I first joined on the first £2,500 spending I would make. That’s £125 in my pocket. On top of that, I get nearly 1% for every pound I spend on this card. 

To make it better, they regularly offer one off bonuses. Sometimes I get a reward (£3, £5, £10, 5%, etc.) for spending in my favourite pub which I would do anyways. 

If the above is something you might be interested in – the Amex I use is here.

safety aspects

Credit cards also offer safety features. Some cards come with insurance and extended warranties on some of your purchases. Others can offer travel insurance or the likes.

These perks are great to have. I would definitely recommend exploring what exactly your card covers so you don’t have to buy the same from a third party.

On top of the above, if a fraud happens and it hits your credit card you are way better off compared to the same happening to your debit card. Money is straight away gone from your debit card. It can take months before you get your money back. In the meantime you will have to worry about how to make that mortgage payment on time.

However, with credit card things are simpler. You report the fraud and this gets frozen on your account for the period of investigation. This means – you do not have to pay this back while the issue is being taken care off.

On top of the above – paying with credit cards is safer. In case you have an issue with your purchase, the transaction can be frozen. This isn’t the case if you pay in cash or debit card. The moment the money is gone – you will have to get it back from the vendor you spent it with.

it isn’t your money that you use

The other point I love about credit cards – you get to spend someone else’s money. This is amazing in my view. You only get to pay it back in over a month after your purchase.

Not only you get the benefits like points or cashback. On top of that, you can make interest on money that sits in your current account. There is a watch out – this is only the case if your current account pays interest on cash sitting there. 

If you were to get 1% cashback and 1% interest for holding cash in your account – that’s 2% you made by using someones money. This has to be the biggest life hack out there.

it can be a requirement to have a credit card

There are also some services you might not be able to get without having a credit card. This is often the case with services that have potential additional charges.

The examples of the above are hotel rooms and car rentals. Hotels will not know how much of the mini bar you would consume. The car rental company isn’t sure if you return the car with a full tank of fuel or not.

In order to make the above process smoother for vendors – they prefer credit cards. They can simply block an amount on your card. The final charge will be issued the moment they get the car or the hotel room key back.

there are some watch outs as well

Credit cards aren’t all rosy though. I won’t go into too much detail but will cover the key points to consider.

Credit cards can be risky to use if you know you are likely to over spend vs the cash available on your debit card. Over spending and not repaying on time will result in expensive charges applied to your account.

Paying on time is the key even if you don’t tend to over spend. Spending above your credit limit will be another instance when you might be charged with a fee. 

It is also worth to consider – if you max out your card, this will be a negative point on your credit report. This can drag your credit score down. This can make many big purchases more expensive due to higher interest rates you will be offered.

summary

Credit cards are great in my view. The key with these is to know how to use these and what to avoid.

It is an absolute miracle that you can actually make money by using other peoples money. However, the key is to make sure you repay everything you owe on time. This way you are confident you don’t have to pay fees.

On top of the above, the lender is likely to take away any cashback or points that you get.