Ask MoneyMarvel: Should I get a credit card?
By
31 March 2023
One of the most common questions we get asked is along these lines:
"Why should I get a credit card? I can already pay for the things I need, and I don't want to take on the debt."
Great question! Caution around taking on debt unnecessarily is very sensible, and credit cards can be dangerous if they aren't used carefully. They can be one of the most expensive forms of debt available, so they're only suitable if you're confident you can pay them off in full each month.
That being said, they do also have some distinct advantages over debit cards. In this article, we'll explore why you might want to consider a credit card (and also why you might want to avoid one).
Benefits
'Section 75' protection
It sounds technical, but Section 75 protection is actually quite simple. It means that if something goes wrong with a purchase you make using a credit card then both the merchant and the credit card lender are equally liable for putting things right.
For example, let's say you bought an expensive new TV from an electrical shop on a regular debit card. If the shop goes out of business before delivering you the TV then unfortunately you're likely to be out of luck - you'll have lost most (if not all) of your money.
If you'd made the same purchase on a credit card with Section 75 protection then you'd be in a much better position. Once it became clear that the electrical shop wasn't going to deliver the TV you'd be able to apply to a credit card company for a refund - and they're legally obliged to make things right for you.
This is the key reason that many people recommend putting any large purchases that may carry some risk on a credit card.
Build up your credit history
This advantage is likely mostly to benefit two main groups of people:
- Those that are younger, or those that haven't chosen to do much borrowing in the past
- Those that have a poor credit score, for example, because they've defaulted on other historical debts
Spending on a credit card (and then consistently paying it back on time) is a great way to demonstrate to lenders that you can be trusted with borrowing money. Your credit score is one way to track this, but generally, lenders will be looking for evidence that you've behaved sensibly with credit in the past.
This is particularly helpful if you're considering taking out large loans in the future, such as a mortgage for a house or a car loan. In both cases, lenders will be keen to see a solid credit history.
Note that this benefit takes time to take effect. In the short term a new credit card is likely to harm your credit score as new applications for credit always make lenders nervous, but if you consistently meet the repayment schedule your score will soon improve. For that reason only consider a credit card if you want to borrow sometime in the future, not if you're looking to take out a new mortgage in the next couple of months.
For those that have particularly poor credit scores (because of past defaults) it is worth looking for credit cards specifically targeted at rebuilding your credit history. Whilst these typically have lower credit limits and higher interest rates, they can be a good choice when you won't be approved for a 'regular' credit card.
Rewards may be available
For those that are eligible some credit cards will offer rewards and benefits for using them. This could vary from simple cashback, to points and miles (e.g. Avios points), or other benefits like airport lounge access.
If you're considering a card for this purpose then it's worth shopping around to understand all the different benefits that might be available. Some reward credit cards will charge a monthly fee - if this is the case then do the maths to make sure that the value of the rewards you'll be receiving more than exceed the fee you'll be paying.
Remember that debit cards can also offer rewards too. In fact, the highest paying fee-free cashback card available at the moment is the Chase debit card - which offers a flat 1% cashback for your first year. If you want a card for the rewards alone then this is a great choice (but it doesn't offer the other advantages of credit cards listed in this article).
'Stoozing'
This is a more advanced advantage for the savvy savers amongst you. Stoozing takes advantage of the fact that some credit cards can offer lower interest rates than the best available savings account (some credit cards offer introductory rates as low as 0%!).
Stoozing simply means doing your usual spending on a low-interest credit card and making only the minimum repayments against it. You can then take the money that you would have spent and put it in a high-interest savings account - benefiting from the difference in interest rates until you need to pay off the card balance.
Once the introductory offer on the credit card expires it may even be possible to balance transfer the full amount to another 0% credit card and continue the cycle. Often card companies will offer such balance transfers with Introductory 0% offers.
However, you can't count on there being a 0% balance transfer available at the end of your card's introductory offer, so make sure you always keep the money you need to pay off the full card balance available (don't lock it away for too long in a fixed savings account, and definitely don't spend it!).
Things to watch out for
Credit cards do also have some notable drawbacks. It's worth being aware of them when you're deciding whether one is the right fit for you or not.
Interest rates
Many credit cards can charge a spectacularly high rate of interest, especially after any introductory offers finish. If you let debt accumulate on these cards then they can quickly become one of the most expensive ways to borrow money.
For example, if you borrowed £1000 on a credit card at 30% APR and let the balance sit there rather than paying it off in full immediately then you'd be paying the equivalent of £300 in interest alone. And you still have to ultimately pay off the balance on top of that!
This is why we generally recommend paying off your card in full each month, unless you're trying to stooze (see above). All credit card companies should support a direct debit to pay off the full balance each month - just ask for it if you can't see the option. Doing so guarantees that you won't pay any interest, and avoids you getting into a situation where the debt runs away from you.
Credit can encourage you to spend more than you normally might
This is really a point where you have to know yourself and know what your own temptations are. If you haven't had credit previously and don't have large savings then getting a credit card may be the first time where you've suddenly had access to a lot of money you can spend. That's a dangerous temptation - although you can spend your full credit limit immediately, you'll need to pay it back eventually with interest.
It's important only to use a credit card to buy things that you would have bought anyway, and that you can afford. The temptation to use them to outspend your means can be strong, but it's important to resist that urge. If you don't think you'd be able to then a credit card might not be a good choice for you.
Don't use them to withdraw cash
Using a debit card to withdraw cash from an ATM is typically free, but that's not usually the case with a credit card. Credit cards will often charge you both a fee for the withdrawal (around 3% is common) and then will also charge you interest on top - even if you pay the amount off in full by your payment due date.
For these reasons, credit cards are a very expensive way to acquire cash. If you need access to cash then stick to your debit card.
Penalties if you don't keep up with payments
Many cards will charge you additional fees if you miss one of your regular payment deadlines, or if you pay less than your minimum payment in a month. This is another reason why we'd advise setting up a direct debit to repay your card in full each month. And also a helpful reminder to carefully check any fees that a card might charge you before you sign up for it.
Conclusion
If you're confident that a credit card won't tempt you into spending money that you otherwise wouldn't, and you're confident that you can commit to repaying it in full each month, then a credit card can offer significant benefits as outlined above. We'd generally recommend getting one, just make sure you use it responsibly.
