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Best practices for using your credit card
If you pay with plastic for some things in your everyday life, you’re certainly not the only one. According to recent research* carried out for us, three-quarters of Brits now have a credit card. Credit cards can be a great way to manage the cost of stuff you can’t afford to pay for outright, or just as an alternative to your debit card, as long as you can afford to pay it back. It can also help you to build your credit score, meaning it could be easier to get a mortgage or loan in the future – again, providing you manage it responsibly.
Paying it back
Whenever you borrow money on your credit card, you should ideally aim to clear the full balance every month, so you can avoid racking up interest on what you owe. That’s how the majority of people with credit cards manage their spending, as the research found that three in five say they pay off their balance in full each month – whether by Direct Debit (DD) or manually.
Setting up a DD to clear your balance automatically is a good idea, as it means you’ll never forget to make a payment (providing there is enough money in your current account to cover it). Most card providers will give you the option of setting up a DD to cover either the full balance outstanding each month, or the minimum payment. Even if you plan to pay back more than the minimum each month, it is still a good plan to set up a DD to cover the minimum monthly payment. So, if you forget or can’t afford extra one month, you’ll avoid late payment fees and any damage to your credit rating.
If you can’t afford to clear your full balance every month you might be tempted just to make just the minimum monthly payment, like one in six credit card users do. While this means you’ll avoid any late or missed payments charges, paying just the minimum will dramatically extend the time it takes to clear your balance, meaning that you’ll probably pay a lot more interest on what you owe. Try to pay off as much as you can reasonably afford, but if you’re likely to be trying to clear the balance for a while, you should try and pay a set amount every month. This will make it easier for you to factor it into your budgeting and means you’re less likely to miss any payments. An easy way to do this is to set up a regular standing order to your card provider for a fixed amount.
Cost of cash on credit
Your credit card is a convenient method of payment, but you should try to avoid using it to withdraw money from cashpoints, or else you could be hit with a costly fee and interest charges. It may also take a toll on your credit rating, as lenders view taking cash out with a credit card as bad money management. Two-fifths of credit card owners say they have used their card to withdraw money from an ATM, but a quarter of these say they only did it by accident. Another two-thirds say they use their credit card for cash in an emergency, while one in nine say this is something they do regularly.
Interest on cash withdrawals is usually charged from the date of the transaction – even if you clear your balance in full. Many providers also charge a higher interest rate for cash withdrawals than for purchases.
You may also have to pay fees and be charged a higher interest rate if you use your card to buy foreign currency as well as some other types of spending, like gambling transactions or competition entry fees. Stay away from these types of transactions and manage your money responsibly with your credit card, by just using it to make payments in shops or online.
*OnePoll questioned a nationally representative sample of 2,000 adults aged 18 and over between 11th February and 23rd February 2015, of whom 635 were in Scotland