Credit cards are often demonised by the personal finance community. Quite rightly in many circumstances as they are synonymous with debt and poverty. However, they can be an effective money management tool if managed correctly. They do not have to provoke fear or even be difficult to manage. This is how and why I use a credit card.
- How To Start With A Credit Card
- Managing and Improving A Credit Score
- Interest Free Credit Cards
- Reward Based Credit Cards
- Making Payments Abroad
- Debt and Credit Cards
Starter Credit Cards
The first credit card I had was my first year after graduating from university. This wasn’t because I was lacking in money. I was lucky enough to get a reasonably well paying job so it was more a case of forward-thinking and improving my credit score. It was also important from the perspective of being able to pay for hotels and plane tickets etc. as you are covered for items over £100 on a credit card.
I used the equivalent product to the Barclaycard Foward credit card. However, it’s absolutely essential to remember to pay the balance off in full every month or pay the price of a high APR rate. I just used this card to make the occasional purchase to improve my credit rating. For example, I’d put £50 worth of purchases on the credit card and pay it off every month. The purchases were something I’d be buying anyway so I wasn’t spending any more than usual.
Credit Score
It’s important to remember that having no credit history is almost as bad as having bad credit, at least that’s the way banks see it. A good credit score is important not only to be able to get a mortgage or loan, but it’s also important for getting a better rate on the money you borrow.
Credit Score Tracking
I use a free website to track my credit score called ClearScore.Most banks use Equifax and may use this as a reason to decline you a credit card or even a current account. However, I have had success with appealing decisions using my ClearScore information. This app gives you a current credit rating, in addition to any positive or negative factors affecting your rating.I currently have a score of 584 of 700. Below is a copy of the report from ClearScore showing the positives on my credit report.
- You don’t have any court judgments, bankruptcies or Individual Voluntary Arrangements
- You have no accounts in default or repossession
- You’ve been on the electoral roll at your current address for a long time
- You’ve made very few applications for credit in the past year
- You have held at least one of your accounts for several years
- Very few/none of your accounts have overdue payments
- Your largest credit card limit is relatively high
- You have stayed within your credit card limit in the past year
- You’re using a small amount of your total credit card limit (below 50%)
Something else to note, being registered on the electoral roll at your current address is important in terms of your credit score. As the company doing the check has a full picture of where your accounts are registered. You can also technically receive a fine for not registering.
Interest-Free Credit Cards
Once I built up a good credit score, I was able to acquire credit cards with long interest-free periods which is great in terms of cash flow. For example, I can make an expensive purchase such as a holiday or plane tickets without paying the balance off in full. This means there is little disruption to my savings and investing payment plans.
A good way to manage this is to divide the purchase amount by the interest-free period. If you bought a plane ticket for £1,000 and had 10 months left on your interest-free period a monthly payment of £100 would mean it will be paid off before the offer ends. It’s very important to pay off the balance before the end of the interest-free period as the interest rates will jump up.
It also means that I can keep my cash in interest paying accounts, rather than taking the hit on cash flow and earning less interest. The important concept here is to set a regular repayment plan say £100 a month to pay the card off by a certain date.
So as not to re-invent the wheel, money saving expert continuously updates their website with the best interest-free credit card deals. Their interest-free periods can last as long as 28 months.
Emergency Fund
I recently had a discussion on Twitter around the idea of using a credit card as part of an emergency fund. Having access to a long interest-free credit period would allow you to hold less cash and even keep a higher amount of money invested. An example would be if you lost your job, you can use the credit card until you either get another job or decide to sell off your assets (e.g. stocks). This is, however, a controversial idea and not one I’m even sure I would do myself yet! But it’s food for thought.
Making Payments Abroad
One of the other money-saving benefits of credit cards is that you can make payments abroad without paying any card fees. Cards offered by the Post Office usually meet this requirement. Although Monzo now offers this benefit with their debit card, making it slightly more redundant. All of this means that you don’t have to exchange money prior to traveling, which results in losing out to bad exchange rates and commission.
Reward Based Credit Cards
To date, I’ve only gained cash rewards for credit card signups of £50 in cash, as I usually go down the long-term interest-free route. However, there are cards that offer rewards on purchases such as Avios points (air miles). There are also cards that offer points or cash back for everyday spending. The catch here is that you have to pay the card off in full due to the interest rates.
Additionally, with the air-mile related cards, you have to spend a large amount in order to get the rewards. So these are best for frequent fliers who would be making the trips anyway. These types of cards are still on my radar to look into and get these rewards, even if I am just able to claim the introductory rewards (e.g. 5,000 points when you spend £1,000 in the first three months).
Debt & Credit Cards
The average household now owes £15,385 to banks, credit card firms and other lenders. One charity puts the average credit card debt per household at £2,649and as of April 2019, the average interest rate is 19.81%. With this in mind, it’s incredibly important to make sure you approach a credit card in the appropriate way.
A great amount of credit card debt is a result of people not paying the full amount or even the minimum repayment each month. This results in late fees and interest accruing on what they owe and as a result the amount they are required to pay back increases.
I have to caveat this by saying that credit card debt is also due to systemic inequality issues in the UK, resulting in people bridging the gaps in personal finance with credit cards. This is, however, a topic in itself.
Final Thoughts On Credit Cards
You don’t necessarily need a credit card, nor am I suggesting you should get one. It’s a personal preference at the end of the day but I wanted to write this article because I know from experience that the idea of getting a credit card can be worrying. However, used well they can be a great tool in your personal finance toolbox. Hopefully, I have shown you just a few ways you can use credit cards to your advantage.
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