- Credit cards can help you manage your cash flow, build your credit rating so you can qualify for other financial products.
- There are over 62.8 million credit cards issued across the UK.
- The credit card allows a card holder to spend money up to a pre-set limit and you will get a bill for what you have used each month.
Most adults have credit cards but not everyone knows how to use it efficiently and enhance their credit ratings. Credit cards can help you manage your cash flow, build your credit rating so that one can qualify for other financial products, such as loans and mortgages. It offers flexibility with payments and earn rewards points, which can later be redeemed for travel, statement credits and more. Some cards offer intro interest-free period for shopping. However, if you don’t use them efficiently, you can also get into debt and hurt your credit ratings.
According to comparison website Finder, there are over 62.8 million credit cards issued across the UK, which means there is almost one credit card per person in the UK. Buy-now-pay-later form of credit has recently become popular method of paying for things in the UK, worth £2.7bn (US $3.76 billion). It allows customers to get what they want now and spread payments over a period of time or pay the whole amount later. This form of credit affects your credit scores.
Not understanding how credit card works and how you can use it for more benefits can land you in serious financial difficulty.
Craig Simmons, Head of Debt, Credit Policy and Strategy at the Money and Pensions Service, revealed that 11.5 million people have less than £100 to their name and 9 million people mostly rely on credit to buy food or pay for bills.
Copyright © 2021 Kalkine Media
How Credit Cards Work
Credit cards are rectangular pieces of plastic or metal that can be used to pay for shopping by swiping, tapping or inserting your card into a card reader at checkout. The credit card allows card holder to spend money up to a pre-set limit and you will get a bill for what you have used each month.
When you make purchase with your credit card, it will show up as pending on your account and posted within a few days. Once the transaction starts showing on the account, your outstanding balance will go up.
In order to keep your account in good standing so it does not affect your credit rating, you need to pay at least the minimum amount by your due date (which is the same date every month).
Most of the credit cards also offer grace periods, which allow you to pay off your balance interest free for a minimum of 21 days from the end of a billing cycle. And any unpaid balance after the grace period will incur interest, so a person should try to pay in full. If you use your credit card for withdrawing cash you have to pay interest.
Myths around credit cards
To use the credit card in a best way, one should know what’s true and what’s not so true is a great place to start. So here are some common credit card myths about credit card that you need to be aware of:
- Getting Credit card may land you into large debt: If you know your credit limit, you need to control how much you spend and how you manage your repayments. If you pay full amount you owe every month, you won’t get into debt or pay interest.
However if you can’t control how much you spend its important to consider whether a credit card is right for you. So, it’s necessary to set rules to avoid overspending and you can also set your credit limit at a smaller amount to start, so you can reduce the chance of getting into any debt.
- Checking your credit rating can affect your score: Many people think that checking their credit score will negatively affect their rating and give lenders the wrong impression. But a soft checking of your credit score allows you to keep track of your finances and see how you can enhance your credit score. You can check your credit score on various reliable websites and apps such as Equifax and Experian.However, a hard check such as checking payment history and country court judgments can affect your scores. This usually happens when a company is lending money or credit such as for student’s loan, mortgage applications, car loan, personal loan, credit card applications, and apartment rental applications.
- If you overuse your credit card, but if I pay back in full and on time, I’ll be fine: How to you use your credit card affects your score. However, it’s best to keep your borrowing below 30% of your limit. The higher you borrow, the more lenders will think that you are not managing within your means, which affect credit score.
- A low APR what makes credit card best for you: If you are not able to pay off the full amount each month then the Annual Percentage Rate (APR) is important as in that case you must pay interest on the debt. There are various types of cards that offer reward points and other benefits so it you travel more often you can choice a card that can offer you discount in ticket booking or other benefits.
- Your income affects your credit score- Income doesn’t affect your credit score, if you are applying for loan then there will be check to see hoe affordable it is for you. The credit sore will be affected if you don’t maintain your credit better even if your earning is £100,000.
- Payday loans don’t affect credit scores: A one-off payday loan won’t affect your credit score but habitually relying on it can really affect your credit score and potential lending in the future, like if they apply for loan. These types of loans come with heavy repayment costs that can cause debts to escalate. Regular use of payday loans shows lenders that you are not managing your income.
- You only need to make the minimum repayment: Yes, it’s really important to pay your balance in full whenever possible, but you should always try to pay your balance in full or try to repay as much as possible. Making the minimum repayment can mean it takes you longer to clear a credit card debt and you could pay a significant amount in interest.
- Credit is free money: The perception of credit is free money often comes because of the 0% down payment or similar offers. As customers are too focused on not having to pay up front, making it looks affordable. But there are various other fees involved with paying through financing
- Missing a payment won’t impact your credit rating: No, if you miss one payment on your credit card it can negatively impact your credit rating and your potential to borrow in future.
- I have to spend something on credit card every month: No, of you want to spend something from credit card you can otherwise it’s not necessary to spend something from card. But make sure not to use over 30% of your available credit as this affect your credit score.
- Having too many credit cards will affect my credit ratings: The lenders are more concerned about whether you make your repayment. Your credit rating is determined by the different types of credit you have such as student loan, credit cards etc, and other things such as the length of your credit history and how many times you’ve applied for credit recently and the amount of debt you have.