The drawbacks and benefits of credit cards

What credit limit do you need?

Ideally, you want to have a higher credit limit than you need to benefit from the credit utilisation ratio. This is the proportion of your overall credit limit that you’re using. For example, if you spend £500 on a credit card with a limit of £2,000, you’re using 25% of your available credit.

If you can keep your credit utilisation ratio below 30%, it signals to lenders that you’re a responsible borrower. This could improve your credit rating and help you to secure lower interest rates in future.

However, if a higher credit limit will tempt you to spend more than you can pay back, this benefit could quickly become a disadvantage.

Consider interest and other charges

The interest rate you’ll be offered by credit card providers depends on your credit score and an assessment of affordability. Ideally, you want to be able to pay off your balance in full each month to avoid paying interest.

As well as interest rates, consider any fees and charges you’ll have to pay. For example, you may have to pay an annual fee for certain rewards cards.

You can compare the total cost of borrowing over a year by looking at credit card APR.

Credit card advantages and disadvantages

It’s important to understand the pros and cons of credit cards to make sure having one is the right choice for you.

What are the advantages of credit cards?

The benefits of credit cards include:

Spread the costs of purchases

You can buy something today, then repay the cost over several months. This could come in handy, especially in an emergency.

Interest-free borrowing

If you pay your credit card balance in full each month, you won’t have to pay any interest on what you borrow. Some credit cards come with a longer period of 0% interest on purchases, which could be useful for spreading the cost of an expensive item.

But if you don’t pay off your balance within the interest-free period, you’ll have to pay the standard interest rate. And you’ll have to continue making the minimum monthly repayments and stay within your credit limit. Otherwise, you could lose the 0% rate and damage your credit rating.

Cutting down on debt

You may be able to avoid paying interest on an outstanding credit card balance by switching to a card that offers 0% interest on balance transfers. Just be aware there’s likely to be a fee for making the transfer.

A 0% balance transfer card could help you pay off your debt faster as you won’t be paying any interest on it. But it’s important to pay off the balance before the interest-free period ends, because after that you’re likely to be subject to higher interest rates.

You also need to pay off at least the minimum amount each month or you could lose the interest-free rate and damage your credit score.

Protection from fraud

You should be able to claim for a refund if your credit card has been used fraudulently, as long as you’ve taken proper care of your card.

Safer than carrying cash

You can cancel a lost or stolen card with the provider as soon as you realise it’s gone. Make sure you report it immediately.

Earning rewards

Reward cards offer loyalty bonuses, like air miles or cashback on your spending. Be aware, though, that if you don’t pay off your balance in full every month, the interest you pay may outweigh the value of the rewards.

Building a good credit profile

Provided you’re responsible with your credit card, you could use it to build a good credit score. Responsible credit card use means always making repayments on time and not borrowing up to your limit.

Credit building cards could help you if you’ve had bad credit in the past or if you’ve no history of borrowing and need to build a credit profile.

Spending abroad

Travel credit cards have low, or in some cases no, fees for using them abroad. If you’re a frequent traveller, a card like this could be very useful.

Purchase protection

Under Section 75 of the Consumer Credit Act, you could get a refund if something goes wrong with a purchase you make on a credit card over £100 and up to £30,000. 

However, there’s no guarantee that your claim will be successful. It depends on the circumstances, as well as the card issuer and the Mastercard or Visa scheme rules.

What are the disadvantages of credit cards?

The disadvantages of credit cards can include:

Debt

The biggest disadvantage of having a credit card is falling into debt that you can’t get out of. This can happen if you have a credit card that you can’t afford.

It may be that you fail to keep up with the monthly repayments or you’re unable to pay off the balance within the 0% interest-free period, and subsequently get hit by higher interest rates.

Higher rates of interest

You could pay much higher rates for borrowing on a credit card than you would with a loan.

Damaging your credit score

Missing payments or paying late will not only put you at risk of debt, it will also be reflected on your credit file. This could affect your chances of being accepted for loans or other credit in the future.

Credit card fees and costs

Fees can include charges for going over your credit limit, late payment fees, cash withdrawal fees, fees for balance transfers and fees for using your card abroad.

Some cards even have an annual charge. Find out more about common credit card charges.

Paying too much for what you buy

If you only pay back the minimum amount every month, you’ll pay interest on what you owe. That would, in effect, make your purchases more expensive.

Charges for withdrawing cash

With most credit cards, you’ll be charged interest immediately if you use them to withdraw cash or buy foreign currency.