Best ways to use a credit card

Used carefully, a credit card can be a handy financial tool to help you earn rewards, save money in interest and build your credit score.

Using a credit card to borrow money has many advantages, with one of the biggest being the flexibility it offers. You can borrow as and when you need to and, provided you meet the minimum monthly repayment, you can choose how much to repay each month.

Of course, there are also risks. If you’re not careful, you could end up racking up a big bill that attracts a high rate of interest, making it difficult to pay off and, in the worst cases, your debt could end up spiralling out of control.

But used sensibly, a credit card can be a handy addition to your wallet.

Best ways to use a credit card

Some of the best ways to use a credit card are outlined below:

Build up your credit score

If you don’t have much of a credit history because you’ve never borrowed before or your credit score is low, a credit card can be a good first step to improving it. Some credit cards, known as credit building cards, are designed specifically for those with a poor credit history in mind. They tend to offer low credit limits, but provided you pay back what you owe on time each month, your credit limit will likely increase over time – and your credit score should too.

Be aware that many of these credit cards come with higher interest rates compared to standard cards, so it’s important to pay off your balance in full each month. Once you’ve used your credit card for a while and your credit score has improved, you may be able to apply for a more competitive credit card.

Get cashback and rewards

Many credit cards offer competitive cashback rates or rewards, helping you to earn something back as you spend. For example, you might earn loyalty points at your favourite supermarket or retailer, or you might be able to build up frequent flyer points for your next holiday.

However, the downside is that many of these cards come with high interest rates, so they are usually only suited to those who can afford to pay off their balance in full each month. Some, particularly those offering exclusive perks such as access to airport lounges or worldwide travel insurance, will also charge annual fees, so you’ll need to assess whether you’ll earn enough in rewards to make the fee worth paying.

Save interest on existing debt

If you’re currently paying interest on existing credit card or store card debt, it’s worth shifting that debt to a 0% balance transfer credit card. Doing so will mean you’ll avoid paying interest for a number of months – almost 3 years in the best cases – giving you time to tackle your debt head on without worrying about interest building up.

Be aware you will usually have to pay a transfer fee of between 1% and 3% of the amount you transfer and if you don’t clear your debt before the 0% deal ends, you’ll start paying interest again.

Alternatively, a 0% money transfer credit card enables you to move money from your credit card to your bank account and use those funds however you like. You could pay off an expensive overdraft or loan, for example. You then repay your credit card provider and no interest will be charged for a number of months. A transfer fee of around 4% usually applies.

Spread the cost of a purchase

If you’re planning a large purchase, such as a holiday or new car, a 0% purchase credit card lets you spread the cost of your spending interest-free over several months. This can be much cheaper than other methods of borrowing, but only if you’re confident you can pay off your balance in full before the 0% deal ends.

Protection on your spending

Another great benefit of using a credit card is that you’ll get purchase protection. Section 75 of the Consumer Credit Act applies to credit card purchases of over £100 and up to £30,000. Purchase protection means your card provider is jointly liable with the retailer if you don’t get what you paid for. This includes if the retailer goes bust and you don’t receive your goods, if you receive an item that is not as described or if you receive an item that is faulty. Find out more about how it works in our guide.

Top credit card tips

  • Pay your bills on time. Make sure you make at least the minimum payment each month. Missing a payment could result in a late payment fee and you could lose any 0% promotional offer you’ve taken advantage of. It can also impact your credit score. Setting up a direct debit can help you remember to pay on time.
  • Pay off your bill in full each month. Unless you’re using a 0% deal, it’s best to pay off your credit card balance in full every month. If you can’t afford to do this, pay as much as possible above the minimum amount. Only paying the minimum means you’ll pay hundreds more in interest and it can take years to clear your debt.
  • Pay off your bill before your 0% deal ends. If you’ve taken advantage of a 0% offer, make sure you budget and work out how much you’ll need to repay each month in order to have cleared your balance before the interest-free period ends.
  • Aim to keep your credit utilisation below 30%. Your credit utilisation ratio is the percentage of total available credit that you’re using. So if you had a credit card limit of £2,000 and you had used £1,000 of it, your credit utilisation ratio would be 50%. Experts recommend keeping your credit utilisation below 30% to keep your credit score healthy. (Note that your ratio applies to the sum of all your credit cards.)
  • Avoid large impulse buys. As with any type of borrowing, you should only spend what you can afford to pay back. Resist using your credit card to pay for expensive items you don’t need.

When not to use your credit card

As mentioned above, you shouldn’t use your credit card for frivolous purchases you can’t afford to pay back. If you think you’ll be tempted to spend more than you can afford, a credit card won’t be the right choice for you.

You should also avoid using your credit card for cash withdrawals, known as a cash advance. This is because you’ll be charged a cash withdrawal fee of around 2.99% and you’ll be charged interest on top too. What’s more, this interest is payable from the moment you withdraw your cash until you pay off the balance in full.

If you use your credit card to carry out any of the following transactions, these can also be classed as a cash advance in some cases and should be avoided:

  • Buying foreign currency
  • Gambling or betting
  • Electronic cash transfers (e.g. transferring money from your credit card to your current account)
  • Share dealing or investment transactions

Bottom line

Credit cards can be useful tools for helping you to better manage your finances, but only if you use them with care. Thanks to their flexibility, you won’t be tied into fixed monthly payments (but you must remember to pay off at least the minimum each month) and you’ll be able to borrow funds up to your credit limit as and when needed.

Credit cards offer a whole range of benefits, including helping you to clear debt faster and more cheaply, helping you to build your credit history and offering rewards and cashback. But it’s crucial that you understand how your credit card works, including the fees and interest that may be charged, and that you budget carefully so that you can always afford to pay back what you owe.

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