How To Use A Credit Card Wisely

Credit cards can be scary if you’re not accustomed to borrowing money, or if you’ve had trouble budgeting to include loan repayments in the past. However, if you use a credit card wisely, then they can be very beneficial. We are experts on all things loans, so have all the top tips on how to use credit cards wisely.

How Do Credit Cards Work?

When used well, credit cards are a secure and flexible way to spread costs, budget effectively and to build up your credit score. ‘Credit’ is a form of borrowed money. When you spend money on credit, it doesn’t leave your own bank account, but you know that you owe your credit card company that amount of money. It is then paid off in the future.

Your credit card will have a pre-set credit limit. This is the most amount of money that you can spend on credit. It will depend on the company you’re with and your credit history as to what your minimum repayment is, but this will likely increase in time if you use your credit card well and prove that you’re a reliable borrower.

The difference between credit cards and other types of loans — like instalment or payday loans, which you can compare with Clear And Fair — is that credit cards don’t have a repayment date. Instead, your credit card company will set a monthly minimum repayment. This means you have to repay a certain amount of money on your card every month and the rest will roll over to the next month.

If you pay off your card in full each month, you normally won’t have to pay any interest on the money your borrow, though the exact terms and conditions will depend on your credit card company. If you need to spread repayments, then you’ll be charged interest, which will vary between different providers.

Advantages Of Credit Cards (When Used Wisely!)

When used wisely, credit cards can be a powerful financial tool that can help you with a range of different things.

Advantages of Using A Credit Card Well:

• Helps you to budget
• Improves your credit score
• Protects against problems
• Spreads the cost of purchases over time
• Improves your ability to get a future loan (including a mortgage)

Budgeting

Credit cards allow you to spread the cost of bigger purchases over time, meaning that you can buy something you need now and pay for it over a longer period. This can be really helpful for budgeting well while still buying things you need or want. It’s important to factor in interest rates too though when you’re looking at your budgeting plan.

Protection

Under Section 75 of the Consumer Credit Act, it states that if you purchase something that costs between £100 and £30,000 on credit, then the provider (your credit card company) is liable if something goes wrong.

This means that if a business from which you’ve bought something makes an error or doesn’t provide the services for which you’ve paid, then you can claim back the money from your credit card company.

Improving Your Credit Score

Credit cards are also a good way to improve your credit score. Your credit score, or credit rating, is a number that summarises the health of your credit history to prove that you’re a responsible borrower. Direct lenders look at this when considering you for any type of loan from payday loans to mortgages.

You’re unlikely to be approved for a loan if you’ve got a bad credit score, but equally, if you’ve got a thin credit history. This can seem counter-intuitive, but if you haven’t used credit or loans before then a lender can’t tell whether you will be reliable or not.

If you need to improve your credit score, using a credit card, and using it well, helps to prove that you are reliable when it comes to borrowing money and increases your credit rating.

This has long-term benefits. It helps you to secure future loans, get better rates and better credit cards, and even get a mortgage for a house.

However, you can only get these benefits from a credit card if you do use it wisely. If you miss repayments or borrow more than you know you’ll be able to repay then it could lead to unsustainable debt.

Read our tips on how to use a credit card wisely to make good decisions and build healthy credit card habits.

10 Ways To Use A Credit Card Wisely

1. Avoid Dependency

Before you even apply for a credit card, you need to consider your motivations and your finances. It’s important to only use a credit card to spread the cost of things you know you can afford to pay back in due time. You don’t want to completely depend on your credit card because that might mean you can’t payback what you borrow, leading to unsustainable debt.

If you struggle to pay your bills or need to put standard monthly costs onto your credit card then you might find yourself getting into larger amounts of debt. The best thing to do is to first look at your spending and create a budget.

Using a credit card regularly is fine, but this should be for making the most of money that you have. For example, using it to spread the cost of expenses like a holiday or a new sofa while knowing you can afford repayments, or using it to build up your credit score.

This is a good rule to follow for all varieties of loans. As a payday and instalment loan comparison site, we always advise that you only borrow money that you know you can afford to repay on time.

2. Choose The Right Card

If you decide that using a credit card is a good choice for you, then you have to decide on your credit card company and the specific card you want to opt for. Different cards and companies will offer different benefits and different fees on interest and other payments.

Decide what you want to use your card for: getting the lowest interest on purchases, the most amount of time to repay debts or maybe the rewards for using your card? You can then look around and choose the card that best meets your requirements.

3. Understand Your Card

It’s vital that you understand the terms of your credit card. This means knowing your credit limit, understanding the interest rate, knowing the minimum repayments and understanding any additional fees. If you understand your credit card, then it helps you to use it wisely.

For example, when you know the limit of your credit card, you can ensure that you always spend within that limit to avoid additional fees.

If you’re looking to improve your credit score through your credit card, then you should also consider not spending too close to your credit limit. Credit Reference Agencies can look at the percentage of your credit limit that you regularly use as an indicator of how much you rely on credit and therefore gauge your financial situation. Experian recommend trying to use less than 25% a month of your credit limit. For example, if you have a limit of £1000, try to use less than £250 (source).

4. Set Up Automatic Minimum Payments

You will have to make minimum payments on the money that you borrow otherwise you’ll be charged additional fees — on top of the normal interest. The best way to ensure that you don’t miss a payment is to set up automatic direct debit transfers. This is the wisest way to use your credit card as it means the minimum cost (or more if you set it up to) is paid every month so you never miss a payment.

5. Pay Back As Much As You Can Afford

While you can just make the minimum repayment every month, you will probably find that you will never end up paying the card off. Minimum payments are often so small that they don’t help you to pay the card off long term.

It’s best to pay back as much as you can afford every month as this will help you to pay back the whole loan quicker.

6. Avoid Paying Interest

This point may or may not be the best decision for you, depending on why you’re using a credit card. If you’re using your card to improve your credit score, then this is the wisest action to take. If you’re using a credit card to spread out the cost of bigger payments, then this won’t be applicable.

If you’re using your card simply to improve your credit score, then you’ll want to avoid interest by paying the full amount on your credit card each month. You can set up a direct debit that will pay back the full amount automatically from your bank account.

7. Claim On Lost or Damaged Goods

If you’ve bought something between £100 and £30,000 through your credit card, then you have a right to claim on problems with this purchase to your credit card company. They are liable for lost or damaged goods, or if a business you’ve paid doesn’t do what you paid them to.

If something goes wrong with your purchase, then you should make the most of this and claim from your credit card company. Similarly, if you’re going to make an important purchase, you could do it on your card so you know that you have protection if something should do wrong — but only if the cost is within your credit limit!

8. Avoid Cash Withdrawals

You can withdraw cash using your credit card at a cashpoint, but this can have high charges. It could be a percentage of the amount you withdraw or a set fee, but either way, it’s best to avoid withdrawing cash on your credit card.

9. Avoid Credit Card Cheques

Similarly, it’s also possible to write out a cheque but from your credit card account and not your bank account. However, like with cash withdrawals, this will have additional and often expensive charges. To use your credit card wisely, it’s best to avoid this if you can.

10. Use an App Or Online Banking System

You don’t have to rely on monthly paper statements to keep track of your credit. Banks who offer credit cards will usually incorporate this into their online banking system and app, meaning you can see, control and make repayments from your smartphone.

Other credit card companies often offer apps or online systems that will allow you to manage your credit, checking what you’ve borrowed and making repayments. You could also make the most of automatic text reminders and alerts.

Using the online and digital tools available to you will help you to better use your credit card wisely by staying aware of your credit and in control of your finances.

Follow our top tips on how to use a credit card wisely to make the most of having a credit card, building your credit score and spreading the cost of purchases.

Clear And Fair is a loan comparison site. You can compare payday and instalment loans online to find the best deal on short term loans without hard credit checks or commitments. Why not explore more of our blog? We have everything from ideas for leftover food to checking and understanding payday loan eligibility.