Credit cards can either be your friend or foe depending on how you use them. Find out what you need to do to make sure you never get caught out.
Though some may prefer to give credit cards a wide berth for fear of incurring spiraling interest charges, they aren’t all bad news. Credit cards can provide a convenient and often cost-effective form of borrowing, as long as you play by the rules. Here are the rules that you need to play by to get the most out of your credit card and make sure you never get stung again.
1. Get a good deal
Back to basics first; before you do anything with your credit card, it’s really important you get a competitive card that stacks up well against the others while at the same time allowing you to use it in the way you want.
Depending on what you plan to use your credit for - whether that’s purchases, a balance transfer, or to earn cashback - you should compare the credit cards currently on the market to find one that has the right mix of benefits to suit you.
Make sure you read all the terms and conditions before you apply so that you know exactly how the card will work and don’t suffer any nasty surprises.
2. Keep purchases and balance transfers separate
One of the most costly things you can do with your credit card is to use it as a dual-purpose financial tool for both spending and balance transfers. This is because of something called the negative payment hierarchy which is applied to most credit cards.
This means that any repayments you make to your card will go towards paying off the cheaper part of your balance first (such as any interest free balance transfers) and the more expensive part of your balance last (such as cash advances and purchases that are accumulating interest at the card's standard APR). This trick ensures your credit card provider can get the most interest and income out of your card use as possible because your repayments won’t go towards paying off your interest-earning purchases until any cheap balances are cleared – meaning that you'll end up racking up costly interest.
To get around this, simply keep your spending and your balance transfers separate. The easiest way to do this is to use one card for paying off balance transfers and another for new purchases.
3. Pay more than the minimum
All credit cards will specify a minimum repayment that you must make each month. This is often around 5% of your balance or £5, whichever is lower.
When your statement date rolls around it can be very tempting to take your credit card provider up on the offer of only paying that measly 5% or £5, particularly if you have spent more than you’d anticipated and need some extra breathing space. However, only making the minimum repayment will spell trouble for anyone who has an outstanding balance that's accumulating interest at their card's standard APR.
The shocking truth is that if you only ever make minimum repayments on your credit card you’re likely to build up so much interest that your repayments will end up going towards paying off interest alone rather than the actual balance. This not only means that your purcases will have cost you far more than you ever anticipated, but also that it could take you years and years to pay off your credit card completely.
For this reason it’s really important to always pay a little more than the minimum – ideally as much as you can afford in your monthly budget so that you clear your credit card as soon as possible.
4. Never withdraw cash using your credit card
Cash machines should come with warnings reminding you not to use your credit card for a withdrawal - such is the gravity of getting cash on credit.
If you use your credit card to withdraw cash at the ATM it's likely that you'll not only incur a fee every time you do (often around 3% of however much you withdraw) but you’ll also be charged extra interest - at a rate of up to 30% - on the transaction which is far more even than an uncompetitive credit card would charge for a purchase. Worse still, interest will be start being added as soon as you get your hands on the cash.
You’ll also be stung by the fact that your expensive cash withdrawal is likely to go right to the back of your repayment queue, racking up interest at an alarming rate until you have cleared all the less expensive transactions on your card. The moral of the story is simply never to use your credit card to withdraw cash unless you absolutely have to. Credit card cheques are another 'convenient' payment method that you'll need to avoid like the plague for exactly the same reasons.
5. Clear your balance if you can
Though the ideal is to pay your balance off in full every month so that you never pay a penny in interest, this isn’t always realistic or possible if you have spent more than you intended to one month or for some other reason don’t have the funds available to clear the balance. However, it should be your aim to pay off your credit card balance in full when you get your statement every month, this way you'll never have to pay your credit card provider any interest.
6. Protect your cashback
As important as it is to clear your balance every month with any credit card, this becomes even more salient if you’re using a cashback credit card.
These cards can be great to earn a little extra back on whatever you spend, but if you carry that balance over from one month to the next, the interest applied to your balance will easily eclipse any cashback you’ve earned. This is because the interest rate on cashback credit cards is often higher than other standard credit cards.
As such you should only think about using a cash back credit card to make a payment if you are sure that you'll have enough money to clear your balance completely when you get your statement. This is the only way to make your credit card provider pay you.
7. Give yourself time to switch
If you are taking advantage of a 0% deal on balance transfers or purchases, make sure you are well aware of when that introductory offer ends. Make a note of it somewhere you’ll see it often, and when the date approaches, make sure you switch to a new credit card with a fresh 0% offer in plenty of time if you don’t want to start paying the card's standard rate on any outstanding balance.
Remember that it will take some time to find a new card you want to move to, apply for it, get accepted, and transfer your balance over to it – so be extra prepared; start researching your options and apply for a new card plenty of time ahead of the end of any introductory deal.
8. Repay on time
While you may intend to industriously clear your balance every month, you’ll also have to be careful about when you make your repayments.
The majority of credit cards require you to pay your balance within a set period of time each month, for example you may have to pay within a week of receiving your statement. If you make a repayment before or after this period it could count as a ‘late payment’ and you could receive a fine, so make sure to check the terms and conditions of any repayments carefully.
9. Don’t pay for things you don’t need
Naturally this rule is likely to apply to most things when it comes to your finances, but having a credit card means your card provider will offer you dubious forms of payment insurance or purchase protection - which are often unnecessary and only mean you spend more on your credit card and rack up more interest.
If you only intend to use your credit card for purchases or a balance transfer and do not want to pay for any ‘extras’, make this very clear when applying for your credit card or you could find you’ve been sweet-talked into buying expensive insurance you don’t need.
10. Don’t get scammed
Finally, though it may be tempting to shove your credit card statement out of sight as soon as it comes through the door, it’s important to check this every month – and not only to keep on top of your spending and repayments.
It's really important to check every transaction on your credit card statement and if you spot anything irregular, contact your credit card provider right away to make sure you haven’t fallen prey to identity fraud. Additionally, if you see something on your statement that you think could be an error, don’t be afraid to check this with your provider; mistakes do happen.
