Credit cards advantages and disadvantages

When you compare credit cards, it’s important to understand the advantages and disadvantages of having one before you apply. Read our guide to the benefits of having a credit card and the things to watch out for.

When you compare credit cards, it’s important to understand the advantages and disadvantages of having one before you apply. Read our guide to the benefits of having a credit card and the things to watch out for.

Anelda Knoesen
From the Money team
7
minute read
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Posted 26 MAY 2021

Credit card pros and cons

When you get a credit card it’s important to understand the benefits and the pitfalls to make sure it’s the right choice for you. Pros can include spreading the cost of your purchases, but cons can include racking up debts that you struggle to pay off.

What are the advantages of having a credit card?

The advantages of having a credit card can include:

Spreading the costs of purchases: You can buy something today, then repay the money over several months. This could come in handy, especially in an emergency, like needing to replace your boiler or buying a new fridge to replace a broken one.

Interest-free borrowing: If you pay your credit card balance off 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, which will be more expensive. You also have to make sure you at least keep up with the minimum monthly repayments and stay within your credit limit, or you could lose the 0% rate

Cutting down on debt: You may be able to avoid paying interest on an outstanding credit card balance by switching to a card that offer 0% interest on purchases. There’s likely to be a fee for making the transfer, so remember to take this into account.

A 0% balance transfer card might 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, as after that, you’re likely to be subject to high interest rates. You also need to make sure you pay at least the minimum amount each month, or you could lose the interest-free rate, as well as damaging 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 have taken proper care of your card.

Safer than carrying cash: If cash is stolen, it’s very unlikely to be found and returned, but you can cancel a lost or stolen card with the provider as soon as you realise it’s gone. If you lose your credit card or it’s stolen, make sure you report it immediately. Earning rewards: Reward cards offer different loyalty bonuses, like air miles or even money off your weekly food shopping. 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 always making repayments on time and not borrowing up to your limit, you could use it to build a good credit score.

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. Using a credit building card responsibly can be a way of showing potential lenders that you can manage your money, potentially giving you access to other loans in the future.

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. 

Does a credit card give me protection on my purchases? Under Section 75 of the Consumer Credit Act, you could be protected if you use your credit card to buy something that costs more than £100 and up to £30,000, and something goes wrong. For example, if it doesn’t arrive, is damaged or the company goes into administration. However, this protection is not guaranteed and will depend on the all the relevant facts, including the supplier’s terms and conditions and the rules that your credit card company and the card issuer apply.

What are the disadvantages of having a credit card?

Disadvantages of having a credit card 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 get hit by high interest rates.

High rates of interest: You could pay much higher rates for borrowing on a credit card than you would on a loan, particularly with store cards.

Damaging your credit score: Failing to keep up with your repayments will not only put you at risk of debt, it’ll also be reflected on your credit file and could affect your chances of being accepted for loans or other credit. Even paying your monthly bill late or missing payments could have a negative impact on your credit score.

Credit card fees and costs: Make sure you’re aware of all of the costs that come with having a credit card, not just the interest on borrowing. These 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 – just for having a credit card, even if you don’t use it regularly. Find out more about common credit card charges.

Paying too much for what you buy: If you’re the kind of credit card user who only ever pays the minimum amount every month, your purchases could prove very expensive when the interest you pay is added on. It could be tempting to buy something on special offer with your credit card, but if you then don’t pay it off quickly, the interest could amount to more than the saving.

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

 

How to minimise the disadvantages and maximise the advantages of a credit card

  • Choose the right card for your needs – different types of cards suit different spending and payment habits. If you know you’ll pay your balance off in full each month, a rewards card might work for you. But if you you’ve got a big, unavoidable purchase coming up, like buying a fridge to replace a broken one, then a 0% purchase card might be the best option
  • Never miss a payment or pay late – this’ll help you avoid damaging your credit record and avoid late payment fees. The simplest way of doing this is by setting up a direct debit for your monthly payment. If you don’t want to pay by direct debit, then at least set up a text alert or reminder to pay on time. And remember, it can take a few days for a payment to be processed.
  •  If possible, pay your balance off in full every month – this way you’ll avoid interest charges
  • If you can’t pay in full, pay more than the minimum – this’ll help you lower your credit card debt faster.
  • Stay within 25% of your available card limit to best optimise your credit score – going any higher than that could negatively impact your credit score. Being continually at the limit of the credit available to you could be interpreted by lenders that your finances are strained, which could put them off lending to you.
  • Don’t apply for too many cards too close together as this could signal to lenders that you’re desperate for money. If you want a new card, it’s best to check which ones you’re likely to be accepted for before you apply. Our elegibility checker can show you this without leaving a mark on your credit record. But never take out a credit card if you don’t think you’ll be able to afford one.
  • Don’t use a credit card at a cash machine – unless it’s a real emergency, avoid withdrawing cash with your card as you’ll likely have to start paying interest at once.

Compare credit cards

If you’re not sure which credit card is right for you, we can help you to compare credit cards quickly and easily using our credit card comparison service. And we’ll show you what cards you’re likely to be accepted for, before you apply, without damaging your credit record.

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