How to use your credit card in the right way

Whether you’ve just got your first credit card, or you’re wondering how to start using your credit card properly, our guide covers everything you need to know! Here’s how to use a credit card.

Credit cards are a wonder: they offer you the freedom to make purchases anywhere in the world, and then pay off the balance over a period of time. On top of this, credit cards can offer benefits and rewards. This includes interest-free periods on balance transfers and purchases, cashback, loyalty points, and air miles, to mention but a few. 

Used wrongly, however, credit cards can plummet you into debt, ruin your credit rating, and make it difficult to obtain competitive credit cards in the future. So, to ensure that your credit card remains your best friend, rather than a burden, here’s how to use your credit card correctly:

  1. Do your research before you apply for a credit card

  2. Make all your payments on time

  3. Spend within your credit limit

  4. Don’t use your credit card for cash

  5. Pay more than your minimum repayment

  6. Pay off your most expensive debts first

  7. Consider a balance transfer card if you’re struggling to pay off debt

  8. Use a credit card for big purchases

  9. Check the fees before using your card abroad

  10. Make the most of a cashback or reward card

  11. Use your credit card safely and securely

Do your research before you apply for a credit card

If you haven’t yet applied for a credit card, follow these golden rules to give yourself best chance of getting the best card for you:

  • Check your credit history. It is advisable to check your details thoroughly with all the credit reference agencies, to ensure that all the information held is present and correct. Most of the agencies (Experian, Equifax, CallCredit) offer a free trial period, so you can obtain your record with no charge. Do remember to cancel your subscription though, if you no longer require their services. If you do find any anomalies, you should contact the particular agency immediately and ask them to rectify the mistake (they may need proof that the information is incorrect).

  • Don’t make multiple credit card applications in quick succession. If you do, it will leave a mark on your credit history, making it much more difficult for you to access competitive credit in the future. If you are unsure of your chances, you should undertake an eligibility check beforehand, which will give you the likelihood of being accepted without affecting your credit score.

  • Check the alternative rates on credit cards. Many (though not all) credit card issuers have alternative deals that they offer customers who fail to qualify for the card they applied for. This usually results in a card with a shorter interest-free period and a higher APR. With this in mind, it may make more sense not to immediately apply for the leading balance transfer or purchase deal, but to only apply for the card that you actually need. For example, if you feel you can pay off a balance in 25 months, you would be better served applying for a card offering exactly that. Rather than applying for a leading 36 month card, being rejected, and then being offered an alternative card with only 18 months interest-free and a higher APR.

Once you have received your card and are ready to use it, here are some hints, tips and warnings:

Make all your payments on time

Being late with even one payment can mean that any introductory interest-free offer will be removed immediately, and you will be left to pay any remaining balance at the standard APR. Late payments will incur fees, and will also have a negative effect on your credit rating. To avoid even the likelihood of this happening, set up a direct debit the moment you receive your credit card. This will ensure that you always make your payments on time. If you’re not keen on direct debits, use the free text alert reminders that many card issuers offer.

Spend within your credit limit

When you receive your credit card, you will be informed of your credit limit. If you exceed this limit, even by a small amount, you will lose any introductory offer immediately, and your credit score will also suffer. In an ideal world, you should spend on your credit card, then pay it off before you spend again, but life being what it is, this is not always possible. Most credit card issuers have the facility to set up email or text alerts to warn when you are nearing your credit limit.

What should you not use a credit card for? Cash.

If you use your credit card to take cash out (including foreign currency), you could be charged a cash advance fee. This can be as much as 4% of the amount you withdraw and often an enhanced APR until it is paid off. It is seldom worth it. If you need to take out cash, consider applying for a money transfer card. There will still be a fee to pay, but you will benefit from a period where you don’t have to pay any interest on the cash. This gives you time to pay off the balance quicker.

Pay more than your minimum repayment

If you are paying off a credit card balance over time, always try to pay more than the minimum payment each month. If you don’t, it will take years, even decades to pay off your balance, as the majority of any payments you make will be swallowed up in interest. For example, if you had a credit card balance of £1,000 on a card charging an APR of 19.9% and you just paid the minimum payment every month, it would take 18 years and 5 months to pay it off. Conversely, if you paid £50 each month, it would only take 2 years, 2 months to clear the balance.

Pay off your most expensive debts first

If you have more than one credit card (or other types of debt), it makes financial sense to pay off the one charging the higher interest until it is completely paid off. Of course, you must remember to pay the minimum payment on the lower interest-bearing card every month.

Consider a balance transfer card if you’re struggling to pay off debt

If you are struggling to clear a credit card balance, consider applying for a balance transfer card, which offers an interest-free period. During this period you can reduce your balance without it being swallowed up in interest payments. For the higher duration cards, there is almost always a balance transfer fee. If you are confident you can pay off your balance within a shorter period (or are willing to swap again once the interest-free duration has ended), there are a range of ‘no-fee balance transfer’ cards to choose from. If you are still left with a balance at the end of the introductory interest-free period, you can always shop around for another balance transfer card, providing your credit history is good enough.

Alternatively, you could apply for a card with a low APR. Often there is no balance transfer fee with these cards (though always check to make sure), and the APR will be at a more manageable level for you to pay off your balance.

Use your credit card for big purchases

Use your card for purchasing big-ticket items costing over £100 and under £30,000, even if you have another form of payment. That way, you will benefit from the Section 75 (Consumer Credit Act 1974) cover that credit card payments enjoy. If the goods you buy are faulty, are not as described, or you do not receive them, you can claim the cost of the purchase from your credit card provider. Better still, opt for a 0% purchase card and enjoy the interest-free period they offer.

Check the fees before using your card abroad

Many conventional credit cards apply fees for withdrawing cash abroad, and/or making purchases in a foreign currency. These fees can mount up when you consider how many times you pay for something on your travels – and the bill shock when you get home can be rather depressing. To avoid these fees, take a look at the range of dedicated travel cards, which can offer free foreign cash withdrawals, fee-free foreign purchases, or sometimes both.

Make the most of a cashback or reward card

If you have a cashback or reward card, you can maximise your return by using your credit card for all your everyday spending. This includes your weekly shopping, fuel, or online shopping, even if you usually pay for it with a debit card. You must make sure that you are in a position to pay off your credit card balance in full every month though, as any interest charges will wipe out your earnings.

Use your credit card safely and securely

If you have a credit card, be sure to follow these steps to keep yourself safe and prevent anyone from fraudulently using your card:

  • Check your credit card statement regularly. Check your statement online or on your mobile (ideally every week) to ensure that all the outgoing payments are genuine. If not, contact your credit card issuer immediately. If you have been a victim of fraud, and you have been careful with your login details and PIN, it is highly likely that you will be compensated in full by your credit card issuer.

  • If you access your online banking using a public computer, always ensure that you completely log out of your account – and ideally delete your browsing history and cookies as well.

  • Cutting up your credit card doesn’t cancel it. Your account will remain open, simply with a nil balance. The best way is to either write to your bank confirming that you want to cancel the account, phone them up, or visit a branch.

Credit cards and COVID-19

The coronavirus outbreak is affecting everyone around the world and has put a financial strain on many. If you currently have a credit card and are struggling to meet your minimum payments, help is at hand.

Measures have been introduced by the Financial Conduct Authority (FCA) that allow you to request a freeze on credit card repayments. This is to give those experiencing a change in financial circumstances due to COVID-19 some breathing space. This won’t leave a bad mark on your credit history due to the exceptional circumstances. 

You can apply for a 3-month payment holiday, which can be ‘topped up’ to a total of 6 months; you have until 31 March 2021 to request your payment holiday. Make sure you’ve agreed to it with your lender before you stop paying!

If you can afford to make repayments it’s best to do so, as you will still be charged interest during this holiday period. You might end up paying more in the long run so only request it if you really need it.  

Credit card FAQS

If I don’t use my credit card do I still have to pay?

Some American Express credit cards and store cards charge an inactivity fee if you go without using them for a long time (over 12 months). This is very rare and most credit card companies won’t charge you a dormancy fee for not using your card.

However, if you no longer use your credit card but still have a balance to pay back and interest, you will have to make those minimum payments.

How do payments on a credit card work?

Every time you buy something and make a payment with your credit card, you are essentially borrowing money from your credit card company. You will then need to pay this money back with monthly repayments. If you can pay back during the interest-free period, you won’t be charged additional interest on top. However, this interest-free period on most cards isn’t very long. 

Why use a credit card?

There are many pros and cons of credit cards, but some of the main reasons to use one are:

  • You can make larger purchases that you might not normally be able to afford in one go

  • You can benefit from the rewards that many cards offer

  • You can build your credit history, which will qualify you for better financial deals 

  • Credit cards can offer great purchase protection in comparison to debit cards

All in all, the reason to use a credit card very much depends on your own personal circumstances.

8 February 2021