Making the Most of How to Use Your Credit Card
Credit cards are powerful money-saving tools. Used correctly they can save you thousands of pounds in interest on your borrowing, make you money when you spend with them, protect your belongings and improve your credit rating so more businesses will lend you money at better interest rates.
Harness the Power of a Credit Card
Credit cards are the most powerful financial weapon you can have in your wallet. When used correctly they are a free borrowing facility, a way of cutting the cost of your shopping by up to 5%, and a way of getting extra consumer protection against dodgy dealers and a failing high street. But if you mis-use a credit card you could end up with large, expensive debts and a battered credit rating that will prevent you getting other credit cards, mortgages and loans. Follow these tips to make sure you are using your card to its best advantage.
Set Up a Direct Debit
You must remember to pay your credit card bill on time every month. If you don’t, you will be charged a fee of £12 and probably lose any introductory interest-free deals. The best way of avoiding this is to set up a direct debit. You can set one up over the phone, or online usually, just contact your provider and ask. The main decision is how much to set up your direct debit for. The answer to that will depend on your circumstances and what you are using the credit card for:
No matter what type of credit card you've got, 0% balance transfer, 0% on purchases, cashback, reward or credit builder you should set up a direct debit for AT LEAST the minimum repayment, can be as low as 1% plus interest. you can try our minimum payment calculator to see what a difference this can make.
If you don't have a 0% interest deal on your card you should set up a direct debit to pay the full balance every month. This means you won't pay any interest on most of your card purchases, because credit card companies give you 25 days to pay back your monthly spending before your standard interest rate kicks in. This means you have 25 days from the end of the month in order to pay your bill before interest kicks in. So, if you buy something on the 1st of the month you have 56 days interest-free (in a 31 day month). Buy something on the 31st and you'll only have 25 days interest free. The only exceptions to this are if you withdraw cash with your credit card or pay for something that your card provider sees as being akin to withdrawing cash eg. buying foreign currency or placing bets.
A Set Amount
If you're getting a credit card to clear a debt, whether it's an existing debt or you're going to make a big purchase, it's a good idea to set up a direct debit to clear a set amount each month. There are two different options when it comes to the set amount. If you want to clear the debt completely within the 0% period then divide your debt by the number of months of the deal and set up the direct debit for that amount. For example, if you bought something for £1,000 and you have 15 months interest-free on purchases, you could set up a monthly direct debit for £66.66. This will ensure you spread your payments and never pay interest on your big-ticket purchase.
Paying a set amount rather than a minimum repayment will shave years off your debt
Alternatively, if you can't afford to pay off that much each month, set up a direct debit for as much as you can afford. If that isn't very much your best option is to work out what your minimum repayment will be in the first month and set up a direct debit for that amount rather than just opting to make minimum repayments. When credit card companies calculate your minimum repayment they do it as a percentage of your credit card balance, so your minimum repayment will shrink as you clear your debt, meaning it can take years longer to clear your debt than if you pay a set amount each month. For example, if you owe £2,000 on a credit card and you set up a direct debit for a typical minimum repayment of 2.25% or £5, whichever is greater, it will take you eleven years and nine months to repay your debt. If you set up a direct debit to repay £50 a month you would clear the debt eight and a half years quicker.
Avoid All Forms of Cash Withdrawal
Be very careful before you withdraw cash on your credit card. Unlike purchases, interest is charged immediately when you withdraw cash so you could end up paying a lot of money for the cash. And, it isn't just ATM withdrawals that credit card companies count as you taking cash from your account. All of the following are considered cash withdrawals and will result in additional fees and immediate interest charges:
- Currency purchases - If you buy your holiday money with a credit card it is classed as a cash withdrawal so don't do it. It's far cheaper to get a credit card designed for overseas spending and use that to pay while you are on holiday. Find out more with our guide to using a credit card abroad.
- Buying travellers cheques - This is treated in the same way as buying currency. It's going to cost you so don't do it.
- Placing bets - Whether you use your credit card in a betting shop or via an online gambling website it is classed as a cash advance so you'll pay interest and fees.
- Electronic transfers - Unless you have a 0% money transfer offer on your credit card you will pay interest if you move money electronically from your credit card account into another bank account.
The Importance of Maintaining a Buffer
Maxing out your card can be taken as a sign of financial stress and make you look less attractive to other lenders. This could be a problem if you want to apply for a mortgage, loan, or another credit card. Stick to the 80/20 rule to make sure you always look in control of your debt and not teetering at the edge of debt control. The rule is simple - only ever use 80% of the credit available to you, maintain a 20% buffer. So, if your credit limit is £1,000 try not to use more than £800 of it. Not only will this keeping you looking attractive to other lenders, it also means you will always have a little bit of emergency credit that you can use if the unexpected occurs. You can find out more with our Guide to Understanding Your Credit Score or our Guide to Improving Your Credit Score
Use Your Card to Protect Your Purchases
Credit cards come with handy, free consumer protection in the form of Section 75. This means that if you buy something and there is a problem, for example the item doesn't turn up, is faulty or the company you've ordered it from goes bust before you receive the item, your credit card provider is equally liable with the retailer. So, you can get a refund from your credit card provider. The item you have purchased has to be worth between £100 and £30,000 and you can reclaim the full cost of it even if you only put a deposit down with your credit card. For example, if you bought a £15,000 car but only paid a £500 deposit on your credit card - your credit card provider is still liable for the full £15,000 if something goes wrong. Get in to the habit of always putting your purchases on your credit card and see our guide to Section 75 of the Consumer Credit Act for more information.
Cut Up Old Credit Cards
If you aren't using a credit card, and don't plan to ever use it again, cancel it. Having too many credit accounts open is bad for your credit score because lenders don’t like you to have access to too much credit. The worry is that either you won't use the credit they give you (making them no money), or you'll suddenly use their credit and the existing credit you have and then be unable to pay back what you've borrowed. So, dig out those old credit cards, call up the card provider and ask them to cancel your account. Then cut up the card and throw the pieces away. It's important that you cut them up so no-one can use them to steal your identity.
Keep an Eye on Your Bills
Protect yourself from fraud by going through your credit card statement every month to check for irregularities. Be on the lookout for:
- Thieves - Are there transactions on your card that you didn't make? If so call your credit card provider immediately (the number will be on the back of your card) and report it. They can then cancel your card and remove those charges from your account.
- Mistakes - Are there any charges that are far higher than they should be? If there are speak to the retailer to arrange a refund.
- Out-of-date Subscriptions - Are there any regular payments for things you no longer use? If so you will need to speak to the business taking the payments. Unfortunately your credit card provider cannot stop the payments.
- Interest Rates - Check what interest you've been charged. You might have taken the credit card because it had a really great introductory offer but if that's run out and your rate has sky-rocketed it may be time to get a new card.
Loyalty Doesn't Pay
In the world of finance loyalty rarely pays and credit cards are no exception. If you've had your card for a couple of years you probably aren't getting the best deal possible so take a few moments to use our advanced credit matching technology and find out if there is a better credit card our there for you. It may be that your good use of your card has improved your credit rating meaning you can get access to better credit card deals and lower interest rates, or maybe your credit habits mean you would benefit from a cashback or rewards credit card. Whatever it is our tool will find the best card for you.
The Golden Rules of Credit Cards
- Set up a direct debit for your monthly repayments.
- Never withdraw cash, buy currency or gamble with your credit card.
- Try not to use more than 80% of your credit.
- Put your big purchases on a credit card to get extra consumer protection.
- Cut up your old cards.
- Keep a close eye on your bills.
- Never stick with one card for too long.