Do I really need a credit card? Five ways spending on credit could benefit you

It seems counter-intuitive, doesn’t it, that spending on credit can actually be good for you financially. Even the term ‘credit’ can be misleading, as spending with a credit card essentially means creating debt for yourself.

While this definitely highlights one of the downsides to using one, it turns out that there are actually some real benefits to spending on a credit card - as long as you wield it wisely! We’ve put together a list of some of the benefits that come with making purchases on a credit card. And, of course, we’ve also outlined how to avoid some of the pitfalls. Read on for all the details…

Credit card options

First things first; It’s important to get a handle on the options out there. Different credit cards come with particular benefits or incentives, and which one is right for you will depend entirely on your own personal financial circumstances. Different types of credit card can:

  • Offer rewards on certain purchases such as air miles or cashback.
  • Let you transfer an existing balance onto a new card with a zero or low interest rate.
  • Help you build a credit report.

What are the pros of spending on a credit card as opposed to cash or debit?

1. Purchase protection

Under Section 75 of the Consumer Credit Act 1974, certain products or services that are brought with a credit card that cost between £100 and £30,000 are automatically protected if something goes wrong. It’s a great bit of consumer protection! So for example, if you’ve booked a flight to New York but the airline goes bust before you can make your trip, you’re likely to be able to claim the cost back from your credit card provider!

2. Benefits or rewards

Some credit cards also offer rewards like air miles, cashback, travel insurance or vouchers for certain shops. If you’re using a rewards card, make sure you pay your credit card back in full each month, or the rewards you earn might not be worth as much as the interest you’ve accumulated on it!

3. Interest-free loan

If you’re needing a boost for a single large payment, then a 0% purchase card could be the way to go. These can be interest free for up to 27 months, but make sure you pay it all back before the period ends, as when the interest kicks in it will usually be at a pretty steep rate!

4. Credit score

If you've got a rocky credit history, then using a credit-building card could boost your credit score, as long as you’re on point with your payments. These cards usually have a low limit and a high interest rate, which is a reflection of your current credit situation, but paying off the bill each month will tell creditors that you’re creditworthy and could go some way to improving your score. But don’t forget: the card should be paid off in full each month to avoid the higher interest that they generally come with. Otherwise, you could be facing more debt issues.

5. Paying a lower interest rate

Balance transfer credit cards allow you to pay off an original credit card debt at a lower interest rate. Many of these transfer balance cards offer a 0% introductory rate that can last for between 6 to eighteen months, and the idea is that, by transferring debt from one credit card that has a high interest rate onto a card with a lower rate, you’ll only have to pay off the principle rather than your payments going towards interest. However, interest rates will go up after the introductory period has ended, so make sure you check the small print before you take one out. Find out more about balance transfer cards here.

What are the risks?

For all of the benefits, there’s no denying that credit cards still come with risks, so you need to be mindful of how you’re using your card. Make sure you’re not spending more than you can afford to pay back, as late payments can damage your credit record. Having too many cards can negatively impact your credit score too, so it might be worth thinking about the number of credit cards you already have before applying for any more. Have a think about those different types we mentioned up top, and choose wisely so you get the best options for you.

There is also the risk that your low or 0% introductory rate runs out before you’ve had a chance to pay off the card. Make sure you read the small print before taking out any card so that you’re prepared for any higher interest rates that you might be faced with.

Likewise, make sure any rewards or points that you’re accumulating aren’t being negated by high interest rates! It’s easy to get distracted by a flashy store vouchers, but if you’re not getting back more from these than you’re paying out in interest, it may be time to pay off and expire that particular card!

A few reasons why a credit card may not be for you

Ultimately the biggest risk of spending with a credit card will always be the potential to slip into unmanageable debt. Depending on your own financial situation, there may be a few reasons why a credit card might not be your best option for now:

  • If you can’t pay off your credit card in full and on time
  • If you’re not in a position to pay off your card before any introductory low interest rates expire
  • If you find it difficult to stay below your credit limit
  • If you already have several active credit cards

At Yolt, we’re on a mission to empower you with your money, but our blog is not official financial or professional advice. If you're looking for more information on credit cards or debt help and consolidation, seek independent financial advice.

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