Everything you need to know about credit cards
In much darker days, I had the joy of promoting credit cards in a popular department store. Unsurprisingly, it was completely dreadful.
It left me acutely aware that credit cards are generally treated as if mere contact with one will cause instant debt for life. And while they certainly do present a certain dangerous temptation (though this makes them sound far more glamorous than they actually are), credit cards need not be as fatal as some make out. In some instances, they’ll actually be a benefit. Trust us.
If you've got 3 minutes, this video is pretty spot-on:
Should you get one?
Though they can do good, credit cards have been known to ruin people: not only do debts pile up at an alarming rate, but once the initial amount is paid off, the interest comes along and demands even more. They are an extremely efficient way to ruin your finances for life – and that’s a serious warning, not some glib throwaway. Credit card debts can stop you getting a mortgage or a loan.
A credit card might work for you, provided you're responsible with it.
The rules for applying
- If you aren’t super responsible with your finances, don’t get one.
To stand any chance of getting along with a credit card, pay it off in full, on time, every month. Which means if you’re the type who ever goes ‘Oh sorry! I’ll pay you tomorrow, I just forgot…’ then you’re probably not well suited to a credit card – no credit card provider has ever said ‘Oh! It just slipped your mind?! Totally don’t worry. We won’t charge you interest.' It's never going to happen.
- If the only thing stopping you spending is a lack of funds, don’t get one.
A credit card is great for getting you through a monetary drought, when you know money is coming in soon, but don’t have it just yet. It’s not an excuse to go crazy – if you want one so you can buy some new clothes every now and then, or fancy eating out more often, or need to cover a holiday then you’ll end up in serious trouble.
A credit card isn’t free money: think of it as a way to free up money when you need it but not as something that makes you richer.
- Don’t apply for many cards at once.
If you do, you're less likely to get one. It’s not that other lenders can see if you’ve been rejected or not but they will have a good idea by the number of applications – if you’ve been applying for so many, why would you be applying for another - unless you've been rejected? When you're a student with little credit history, if one company see you’ve been rejected, they may think you’re a risk and reject you too.
Why would you want one?
Why would anyone want to use a credit card? Certainly, they come with risks - but if you’re looking for thrills, you’re searching in the wrong place. But if you know how to use one then you can get something back:
- You could improve your credit rating.
There is no such thing as a ‘credit score’, in the sense of a number next to your name accompanied by a tick or a cross. However, when lenders (like banks…) do consider your application (say, for a loan, or a mortgage) they’ll look to see how you are with borrowing and repaying money. If there’s something for them to see –hopefully you being responsible- then you stand a good chance of getting the credit you need.
- Extra funds if you’re desperate
It’s often tough to stretch the maintenance loan a whole three months, especially as it’s so inadequate. A credit card can help you get through the last few days of low funds BUT ONLY – yes, in capitals! – if you realise that the money you’re spending now is coming out of your future budget and will have to be paid back… meaning you’ll have to cut down on future spending. It is a much preferable option to using a Payday loan though, which is a sure fire route to more debt that you can handle.
- Learn decent spending habits.
If you can learn to handle a credit card now – and it is a big if- then it’ll stand you in good stead for the future.
- You’ll get protected on purchases over £100, up to £30,000.
No, really. S75 of the Consumer Protection Act 1974 means that if anything goes wrong on a purchase over £100 (for instance, the shop you want to return a good to goes bust) then your credit provider, the card company, is equally liable for the funds, meaning they’ll give you your money back. Hooray! It applies to online sales too.
The Dos and Dont's
Sorry - but you have to know...
Credit card companies rely on the ignorance of consumers to make their money. Follow these rules to make sure you never pay a penny more than you need to.
- Pay it back in full, every month.
It’s not being lent the money that ruins people, it’s the paying back. When you bill comes in, it'll come with the option of paying off a ‘minimum amount’ which is tempting as it’s often a slight amount.
Don’t be drawn in – you’re only putting the big payment off but now it’s collecting interest too. A few minimum payments later and you’ll be facing frightening debt. So instead, pay your bill back in full, every month. Please, don't make us say it again.
- Set up a direct debit to pay your bill.
Or at the very least, put fifty reminders on your phone. If pay your bill late, you’ll be fit with the aptly named ‘late fee’, typically around £12 – which is rubbish. Worse still, they go on ‘file’, so future card providers and lenders will know you’ve missed a payment, which may have an impact on future borrowing. Try not to miss any and be sure it never ever becomes a habit.
- Never, ever use a credit card to take out cash.
It’s useful to spend in cash, so you’re aware of exactly how much you’re spending. But take it out with your debit card and never, ever using your credit card. More never ever than the never ending story.
Why? Because most credit card companies whack on a charge, around 2 or 3% and charge interest from the moment those crisp notes touch your fingers, unlike normal purchases where you have 50 days to pay before the interest begins.
- Don’t use it to take out currency abroad.
Just as you shouldn’t take out money with one over here, don’t use it abroad. You’ll be hit with a higher rate of APR and a fee.
- Stick to your limit.
This is fairly self-explanatory. Some cards will block you from spending over your limit but most will let you gloriously bust your limit in an overspending blaze sure to cause a financial meltdown. Any overspending will see you face high charges and, in some instances, increased interest rates.
What to look for in a credit card
Look closely at what you're getting - credit card providers love to bury the less desirable aspects of their 'deals'.
Ideally, you want a high credit limit and a low interest rate.
Credit cards, like student bank accounts, often come with a bunch of freebies – have a look at these but remember, these are the sweetners banks use to lure you in and shouldn’t be the be all and end all. A low interest rate is key to avoiding horrendous debts – but remember, even the best are around 18-20% and some are nearer 35%.
What’s better than a low interest rate? No interest. Or at least postponed interest… some cards come with an interest free period on payments, meaning you have a little more breathing room with your payments.
Avoid a card with an annual fee. There are so many free credit cards available these days, paying to have one is paramount to self-flagellation.
On this, look carefully at what fees are around – and how hefty they are. In 2012, the government put a limit on the amount companies could charge, so you won’t find one with hidden routes to instant bankruptcy, but some are more vicious than others.
Good customer service - because problems do arise from time to time; when they do, you’ll want to be talking to some friendly, helpful voice, rather than a grumpy ignoramus. This helpful comparison from Which? should give you an idea of which companies you want to be involved with.
Start at your bank
We’d say – sign up with your bank. So many student credit cards require you to have a student bank account with them to apply, anyway, that we’d suggest they’re a solid bet. They’re less likely to turn you down and at least you’ll have reliable provider. Also, it simplifies your finances, because you’ll only ever have one point of contact. And while, in an ideal world, you’d be on top of everything enough to always check everywhere, sometimes what’s easiest is the most practical option.