The advantages and disadvantages of credit cards
As with most things in life, credit cards have their pros and cons.
Advantages
Under Section 75 of the Consumer Credit Act, credit card issuers and retailers take joint responsibility for faulty purchases. This means that if you pay for something valued between £100 and £30,000 with your credit card your purchase will be protected in the event that it is faulty or you do not receive the goods or services you've paid for. In such cases, you can claim a refund from your credit card provider.
Some credit card providers will offer incentives for using your credit card, such as loyalty points, cash back or donations to charity.
Most credit cards offer an interest-free period, meaning you can benefit from free short-term credit if you clear your balance in full by the due date. They offer flexibility and convenience, allowing you to make emergency purchases or pay for more expensive items by instalments.
Credit cards are accepted in millions of outlets in countries around the world, making them a truly global method of payment.
Disadvantages
- It's easy to run up large debts
Whilst it can be easy to run up large debts on a credit card, it can be much harder, and take longer, to repay them.
If you incur interest charges it can take longer and cost you more to clear your balance.
- No interest-free period for cash advances
Interest rates for withdrawing cash are usually significantly higher than for balance transfers or purchases and there is no interest-free period, meaning interest is charged from the date of the withdrawal, regardless of whether you clear your balance in full or not.
Choosing the right credit card
The way you use your credit card is the key to finding the right deal. We've put together a few common scenarios to help you decide which credit card option may be the most suitable for you.
- You always pay your balance in full each month
Most credit cards offer an interest-free period of up to 59 days from the date of the transaction (except for cash advances). If you repay your balance in full each month then you can use the interest-free period to your advantage, thus avoiding interest charges.
This means that interest rates will not be your primary motivator for choosing one credit card over another; instead, you can look for a card that offers a good incentive scheme such as cash back, loyalty points or donations to charity.
- You clear most, but not all, of your balance each month
If you clear most, but not all, of your balance each month then you may want to consider a credit card with an introductory rate, preferably 0% interest. A number of credit card providers offer interest-free introductory periods, however always check what the interest rate will revert to when the introductory period expires - if you haven't cleared your balance in full by this time then it will start to accrue interest. If you do still have an outstanding balance at the end of the introductory period, you may want to consider making a balance transfer to another credit card to take advantage of another introductory rate.
If you don't think you'll clear your balance by the end of the introductory period and you can't be bothered switching, then a credit card that has a low standard rate may be a better long term solution.
- You have an existing debt to transfer
If you have a debt on an existing credit card and are paying the standard rate of interest then you could save money on interest charges by transferring it to a new card that offers a low or 0% balance transfer rate. Most credit card providers now charge a fee for balance transfers, which is typically 2-3% of the balance transferred. Even if there is a fee, transferring your balance can still be cost-effective if you are switching to a 0% or low interest rate offer.
If you also plan to use this card for new purchases then look for a credit card provider who offers an introductory period for both purchases and transfers. Alternatively, have a credit card for each purpose – one for the balance transfer and the other for new purchases.
- You regularly use your card overseas
If you regularly take trips abroad and use your credit card either to pay for goods or services or to withdraw cash, then it's important that you choose a card with no overseas usage fees.
Credit card exchange rates are based on the Visa and MasterCard wholesale rates, with an additional charge (loading percentage) of up to 3% added by the credit card provider. Not all credit card providers will charge these fees and if you find one that doesn’t then this can equate to a significant saving when you make a large number of overseas transactions.
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