It’s not difficult to see why there are over 60 million cards now in circulation in the UK, as many people are tempted by the lure of free credit. But as national and personal debt seems to spiral out of control on both sides of the Atlantic, there never has been a more pressing reason or time to get sensible with your finances. Credit cards and the term ‘debt’ have unfortunately become intrinsically embroiled with one another. However, with a bit of financial common-sense, credit cards can be a useful method of purchasing without leading to debt.
When used correctly, credit cards do give their users various advantages such as the opportunity to purchase items on credit, paying for them at a later date. This may be handy if your next pay check is not due for another 3 weeks as buying an item on a credit card may give you up to 60 days interest free credit before you must pay the outstanding amount.
Credit cards also offer their users extra consumer protection compared to that of a debit card. This may prove invaluable when something goes wrong as your credit card provider should be able to offer a refund. This proved invaluable for many holiday makers last year as many travel companies went into administration and flights were cancelled due to the volcanic ash cloud. It might also be worth mentioning that credit cards have got many a holiday maker out of difficult situations abroad when other cards have been lost, stolen or rejected.
With these advantages in mind, it is of utmost importance to be aware of the terms and conditions on your credit card.
Be sure of the APR or Annual Percentage Rate of your card. This is the standard method of indicating the cost of borrowing and will vary from lender to lender, card to card. This will include the level of interest you will be paying. Lenders will usually entice users with an initial introductory offer of 0% interest for a certain period. It may be useful to set a reminder for when this period ends to make sure you will not be charged for any unpaid purchases, or to consider switching to a different deal.
Interest rates may also vary depending on the different uses of your card. For example, using your credit card for cash withdrawals, foreign currency transactions or credit card cheques may involve a larger interest rate, as well as an additional lender charge. It most cases it may be cheaper to find an alternative method of carrying out these transactions.
Charges may also be added regarding late payments and the credit limit, or the amount you are permitted to spend, on each particular card. The lender sets a limit to each credit card and higher risk borrowers such as students will have a lower credit limit than an academically trained professional. As well as a charge for breaching your credit limit you may find your card frustratingly refused and blocked until you contact your provider.
Finally, try not to fall into the habit of making minimum repayments. Whilst you are taking some action towards paying of your bill, the interest rates will be gradually increasing meaning that you will eventually pay more in the long run.
Using credit cards correctly can offer the user great deals and the freedom to ‘buy now, pay later’ but they need to be used with caution. Ensuring that monthly repayments are met builds a responsible profile with credit rating agencies, thus improving your credit rating and opening up future financial options such as loans and mortgages. At the other end of the scale, missed or late repayments can send you into a downward spiral, seriously damaging your credit rating and making it extremely difficult to get any further financial products.
This illustrates the importance of financial awareness and planning to avoid debt and huge problems in the future. There are ways of successfully managing your fiances, but there are also strategies in debt managing should you find yourself in trouble.