Are you tired of that 'broke student' cliché? I know I am. Credit cards can be a great way of buying now and paying later but it can also be a slippery slope into debt if not managed properly and carefully.
I consulted an expert to help write this post so I could give helpful and relevant information. In this article we aim to help readers with understanding credit cards UK, how do credit cards work, and to provide a complete credit cards 101 guide.
It is primarily aimed at those living in the UK, and will cover FAQs about credit card that should know.
This post is all about Credit Cards for Beginners.
Using your credit card
There is no doubt that a credit card can be a very useful item and make life much easier, as long as they are used correctly. In this guide, we will explain when it is better to use your credit card and tell you how to obtain advantages by doing so.
We will also advise you that sometimes it is better to use your debit card so that you avoid a situation where credit card debts become unmanageable.
Finally, we will tell you what to do if problems occur, and how to deal with the situation.
Credit cards vs. debit cards
Your credit card gives you the option of buying things when you don't have the money, then paying the money back later. However, this may not be the only time it is beneficial to use a credit card, and we will go into that shortly. If you use your credit card and pay everything back before the due date, you will not pay interest.
If you have a reward credit card, then you should use them as much as you can while ensuring that you can pay off the entire balance that month.
The key advice about credit cards vs. debit cards is that you should not use credit cards to get cash from an Cash Machine (ATMs) unless in an emergency. Doing so will incur hefty fees. It is far better to use a debit card to withdraw money.
What is my credit rating?
Your credit rating is a record of all your past financial dealings with all kinds of credit. If you missed payments or have made late payments, then this will leave a mark on that rating. This is much wider than you think, it covers utility bills and even includes library fines and subscriptions.
It is possible to check what your credit rating is through one of the credit rating agencies in the UK, such as Experian or Equifax. For young people, it is sometimes beneficial to take on small credit deals and pay them off before the deadline to build a credit history.
When you apply for a credit card (or any other loan) they will look at your credit rating. They may decline your application because of it or offer a less attractive deal than if you have a pristine credit rating.
Why your credit score matters & what to do about it
If you have never borrowed before, your credit history will be non-existent and will show as low. So before you apply for a credit card, check your credit rating and if it is low, there are a few things you can do to help.
You may be able to improve your score by trying the following:
1. Make sure you are registered on the electoral roll; this proves you live at that address.
2. Get your name on some bills, like a mobile phone, or utility bill, as these are checked.
3. Pay all your bills on time.
4. Check your credit report and make sure any errors are put right.
5. Open a bank account to prove you are prudent financially.
If you have a low credit score, so the above and wait a few months before you apply for your credit card.
How to qualify for a credit card
First off, you need to be at least 18 years of age. You will need to be a UK resident and have a job. That said, there are some special UK cards designed for students. With some cards, you will also need a certain minimum income.
What you do not want is a lot of refused credit card applications on your record, yes this is recorded, during a short period of time. If the credit card company offers an eligibility checker, use it to check if you pass. This is not recorded on your credit score.
If you do not pass, do not keep applying, again and again, you will make matters worse. Just do what was suggested in the previous paragraph and apply again after a few months.
{The Motley Fool has a short article on how to improve your credit score, that can help build up your credit score}.
Can I still get a credit card with a poor credit score?
If you know that you have a poor credit rating, there might be a "Credit Building Credit Card" that may approve you. These cards make you pay a high APR for the privilege and will give you a minimal card limit.
However, if you use the card regularly and ensure you pay off the balance on time, you can slowly improve your credit score and then try an eligibility checker again.
What to do if your application is rejected
If your credit card application is rejected, it is a sign that your credit rating is not good. This is a situation you need to rectify. Do not just apply to other cards, they will also refuse you (unless they are a credit building card, in which case you may be successful).
Do not apply to other cards, it will make your credit rating worse. Accept the situation, use a debit card, and act as described above to rectify the situation. Make sure any credit you do have, like mobile phones, is managed perfectly and over time you may improve your rating.
Check with the credit rating agencies, like Experian or Equifax occasionally to see if there is any improvement but give it some time for the repair to be completed.
What types of credit cards are there?
I just mentioned Credit Builder Credit Cards. There are several types of cards on the UK market and you should make sure you have an understanding of credit cards in the UK. The most common types of credit cards in the UK are:
Standard Credit Card
These cards have a low APR and you do not get any of the extra features that some other cards offer. This is the type of card you should aim for if you just want the convenience of a credit card.
Credit Builder Credit Card
As already mentioned, these cards are for helping you repair bad credit ratings. As soon as you have achieved that, get a Standard Credit Card as they have a lower APR. They have a place for those that need them, but the cost of credit will be high, so always make sure you clear the balance every month.
0% Purchase Card
These are promotional cards that are attractive during the period of 0% interest. This period will eventually come to an end, and typically you will find that the APR ends up above that of a standard credit card. It is crucial that you pay off the whole balance before the promotional period ends, or it will cost you.
Rewards Card
Certain cards will offer you cashback for every pound that you spend with the card.
How do rewards cards work?
The actual method varies from card to card. Some will offer a percentage of all qualifying sums back in cash. Others will offer you points for every pound spent, and these points can be redeemed against flights or flight upgrades.
Store Card
Many large stores and supermarkets offer credit cards which will give you an extra bonus or rewards when you spend at the designated shop or chain.
{Martin Lewis- a renowned Money Saving Expert has a related article on this called How do credit cards work?}
How long does it take to get a credit card?
Many credit card companies will offer instant approval when you apply online. Other companies are not so quick and will take a week or two to decide. Whichever way they work, it is likely to take ten days before your card is available. You will then be required to activate the card, typically by telephoning an automated phone number.
Then finally you wait to receive your pin number by post, and you are then good to go.
Martin Lewis has a related article on this and made the point of {5 key credit card need-to-knows before and after your card arrives}
What is a balance transfer?
A balance transfer is a procedure by which you can transfer the debt from one credit card to another one. This can be a tool for giving yourself more time to pay off the debt without paying a large amount of interest.
You will normally be charged a fee to do this, but it can often be less than the interest charges you would have paid otherwise.
Budgeting
When you first get a credit card it can be very tempting to spend more than you would otherwise. You suddenly have access to all this extra money and unless you are careful, you can end up with a monthly bill that is more than you can pay off, and you end up spreading the cost of paying off the debt over several months, paying high rates of interest.
The confidence that you have access to this reserve of cash should allow you more confidence in your spending but keep reminding yourself that you need to pay this off at the end of the month to avoid paying lots of interest.
Your card will come with a minimum repayment amount every month. Do not use this as the target for your budgeting or you will find interest just mounts up and you will repay much more than you borrowed. Ideally, pay off the entire balance every month, but if that is not possible, pay as much as you can. If you find you are spending more than you can comfortably afford, leave the credit card locked up at home.
Like with everything there are good and bad to using a credit card- Money Helper made these points in their article: {PROS of using credit cards} and {CONS of using credit cards}.
Payment protection
Another aspect of using credit cards is the protection it gives you through Section 75 of the Consumer Credit Act. This means that in the case of fraud, or if something you order does not arrive, then the credit card company has the responsibility of refunding you the money if the retailer does not. This protection is for purchases between £100 and £30,000. That is very reassuring protection to have.
These days, a particularly useful aspect of this is if you book a vacation/flight and the airline goes bust before you take the vacation, or even worse, while you are away, the credit card company will refund you.
Where can I use my credit card?
You will be able to use credit cards more or less everywhere, but the retailer does have to pay a fee to the credit card company, and they may be reluctant to take a credit card for very small purchases. In those cases, it is better to use a debit card. That is for Visa and Mastercard.
In the case of American Express, which charges a much higher fee to the retailer, you may find that those cards are not welcome, and you should check first.
Can I withdraw cash from a Cash Machine (ATM) using my credit card?
Yes, you can withdraw cash from an ATM with your credit card, but unless it's a real emergency it is not advisable. You will end up paying large cash advance fees which makes it a really bad idea. It is better to use your debit card when taking advantage of ATMs
Top purchases to make with a credit card
Large One-Off Purchases
As a rule, any large purchase should be made with your credit card, because of the extra layer of protection you have thanks to the Section 75 protection I mentioned.
The credit card is also useful for when you need to make a purchase that you cannot immediately afford, and it offers a way to pay later or even spread the payments over several months, but it's always better to pay off as soon as you can.
Flights and Holidays
I have already provided some reasons why booking travel tickets and accommodation is best done through a credit card, but additionally, hotels may often require a credit card as a security deposit, and it can occasionally be hard to book the hotel without one.
Car hire almost always will require a credit card to be held as a deposit. It is almost impossible to hire a car without one.
Travel Cards
If you live in a big city, travel cards can be a huge expense, and paying for them with a credit card allows you to defer paying for them until the end of the month. The same will also apply to other regular bills like mobile phones.
Can I use my credit card abroad?
In almost all circumstances you can use your credit card abroad, and the same rules will apply as in the UK. However, something to remember is that you will typically be charged a foreign transaction fee, as a percentage of how much you spend. It may be prudent to pay cash where possible.
What some people do not realize is that if you pay for something in a foreign currency while sitting at home. You could possibly be charged a foreign transaction fee as well. If in doubt you may want to ask your credit card company for clarification of this.
Do I have to pay interest on every purchase made with my credit card?
In most cases, as long as you pay off the balance before the end of the month, you will not be required to pay interest If you do not pay in full, then that is where the costs start to build up and interest will become a factor.
In the case of 0% interest cards, as long as you are within the period of the 0% interest deal, then you can just pay off the minimum payment and not pay interest. However, the moment the 0% interest comes to an end, the interest will suddenly start to accrue.
Paying off my credit card
Paying off the balance of your credit card is not difficult and there will typically be several ways to do it. You can pay it over the phone directly to your credit card provider, send them a cheque, or set up a bank transfer or direct debit. Where there are branches, you can even walk in and pay over the counter.
In principle, it is always best to pay off as much as you can each month, certainly more than the minimum payment, unless you want to be hit with substantial charges.
{Charges and fees- moneyhelper.org.uk has an article on all kinds of ways you can incur charges and additional fees when using credit cards.}
What should I do if I can't pay my credit card bills?
This is a situation you really want to avoid, and if you follow the advice, we have given you should avoid this. Do not panic and hide your head in the sand. It is important that you act straight away. Contact the credit card company as soon as you know there is a problem.
If you are upfront with them, they may be prepared to cooperate with you to resolve the issue and change the payment in an emergency. Here is what you should do:
Add up your income and expenses.
Look for ways to cut your costs to see if somehow you can make the minimum payment. If this is not possible, calculate a realistic amount that you can pay.
Call your credit card company
You need to explain to the credit card company clearly:
1. Why you cannot pay the minimum.
2. How much you can pay (don't lie and then fail to do so).
3. When you can get back to your scheduled repayments.
4. What new payment you are proposing and how long you would need that help.
Consider credit counseling
If things are falling apart generally, you should get some advice from a specialist. Look for a non-profit credit counseling organization, avoiding commercial operations.
Before you sign up for any services ask if free or how much is it is going to cost you. Avoid any f these organizations:
1. They charge you fees before your debts are settled.
2. They GUARANTEE they can make your debt go away.
3. Tell you to stop talking to your credit card company and other creditors.
4. Tell you to stop making minimum payments.
Conclusion
Your credit score is going to have a big impact on your life. How you manage your credit card will also have a long-term impact on your life. Asking yourself at an early stage "how do credit cards work" and following the advice in this credit cards, 101 is an essential step to your financial health in the future.
