Credit cards are wonderful creations. They can help you in a financial emergency, allow you to borrow money for free and even refund your purchases if you have a rewards card.
Using a credit card wisely can also help you if you’re thinking about how to improve your credit score. (opens in a new tab) or are concerned about how to save money (opens in a new tab).
But you have to be careful and understand how credit cards work (opens in a new tab) before having one. Personal finance analyst at Hargreaves Lansdown, Sarah Coles (opens in a new tab)says, “The right card used in the right way may be the answer to your money headaches, but the wrong card used in the wrong way can make everything worse, and there are some things you shouldn’t never use them.”
You should never use your credit card to…
1. Remove the money from the wall
Although you can use your credit card to withdraw cash using an ATM, just like your debit card, it’s a bad idea, as you’ll likely have to pay an interest rate much higher. (opens in a new tab).
Consumer Credit Specialist at Financial Advisor Royal London, Sarah Pennells (opens in a new tab), explains: “Never, ever use your credit card for cash withdrawals. That’s because you’ll pay interest from day one, even if you pay your credit card bill in full each month. You may also be charged a higher interest rate if you withdraw cash than what you pay on purchases.
So don’t assume that if you have a 0% credit card for new purchases that you won’t be charged interest for using an ATM.
2. Buy foreign currency
A credit card can be very useful when you are abroad, especially in an emergency. But you shouldn’t use your credit card to fill your purse with euros or dollars.
Sarah Pennells, consumer credit specialist, says: “If you use your credit card to buy money for your vacation, that will also be treated as a cash advance. This means that you will be charged interest from day one, possibly at a higher rate.
Specialized travel credit cards charge lower fees for use abroad, but they will still charge interest from day one when you buy foreign currency or use it at ATMs abroad. foreign.
3. Treats and Indulgences You Can’t Really Afford
Credit cards can be a fantastic way to spread the cost of larger purchases, but it’s risky to use them for things you love but can’t currently afford. Unless you have an interest-free card, you will quickly be charged interest and your bill will quickly increase. This one might sound like a bit of a killjoy, but it’s an important rule to follow because it could prevent you from ending up with debts that you’ll have a hard time paying off.
4. Bills and groceries
While putting essentials on a credit card and paying your card in full each month isn’t problematic, if you have to pay bills for your essentials, like food, with a credit card, it can be a warning sign. alarm for bigger money problems.
Head of personal finance at investment firm AJ Bell, Laura Suter (opens in a new tab), says, “Putting these essentials on a credit card isn’t a good idea if you do it regularly and have no way to pay it back.” If you find you can’t afford the essentials each month, seek help from a charity like Citizens Advice. (opens in a new tab) or StepChange (opens in a new tab)who should be able to offer support.
“The risk if you put the essentials on credit is that you can’t repay the debt and you end up in a debt spiral, where interest payments increase your debt dramatically.”
Check out our guide for more tips on how to pay off debt (opens in a new tab) and the support available if you have trouble repaying the money you owe.
You must use your credit card to…
While there are some things you absolutely shouldn’t use your credit card for, there are times when your credit card might be the best way to pay.
1. Items that cost £100 or more
You might be surprised to learn that you get an extra level of consumer protection when paying for items with a credit card.
Personal finance expert Laura Suter explains, “The protection offered by credit cards is excellent. If you spend £100 or more on something you will be covered by a protection called ‘section 75’ which means the credit card company is also liable if there is a problem with the item you have purchased. If the items you purchase don’t turn up, are faulty, or aren’t what was promised, you can file a claim with your credit card company and get your money back.
Best of all, you don’t have to put the full cost of the item on your credit card to get this protection. You can split it into cash or debit card if you don’t want to borrow the full amount.
2. If you go with an unknown company
If you buy from a retailer that you have never used before, it may be useful to use a credit card to benefit from the consumer protection mentioned in the previous point.
Sarah Pennells, consumer credit specialist, says: “You have much better protection if you pay by credit card than if you pay, for example, by online payment from your bank account. If the company you paid turns out to be fake or fraudulent, you can try to get a refund directly from the credit card company.
However you shop, make sure you know your rights as a consumer (opens in a new tab) in case you need your money back.
3. To spread the cost of big expenses
If you can get a credit card that offers 0% on new purchases for an extended period, it can be a great way to spread the cost of a big expense. Laura Suter of financial firm AJ Bell says, “It’s good for big items you buy once a year, like a vacation, or if you’re faced with an unexpected cost and don’t have enough savings, like your washing machine. or boiler failure.
She adds: “The rule of thumb here is that you have a plan to pay it off, otherwise the debt may linger and the interest charges could eventually pile up.”
A good idea is to note the end of your interest-free period. You also need to maintain minimum payments each month, so you don’t get hit with penalty fees.
4. To get rewards or cash back
Normally, putting daily expenses on your credit card isn’t recommended, but there is an exception, as personal finance analyst Sarah Coles explains: “If you’re really disciplined with your credit card and that you know you always have money to pay in full and only once, a rewards credit card can help you earn rewards for everything you spend. This can include cash back, airline miles or supermarket discounts.
The danger is that if you don’t pay off your card in full each month, the interest charges will quickly cancel out any reward benefits.
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