Credit cards can serve as a great means to help towards managing your finances, and can also prove to be a valuable addition towards improving your credit score.
However, as with any form of credit, having a credit card is not always a good fit. This guide will explore whether it is worth getting on - looking at both the benefits and downfalls.
What is a credit card?
A credit card is issued by a bank or financial services company and allows cardholders to borrow funds which they can then use to pay for goods and services.
Credit cards operate under the condition that the cardholder must pay back the borrowed money, as well as any applicable interest, either in full by the billing date or over time as agreed.
What are the benefits of having a credit card?
There are a number of benefits behind having a credit card. These include the following:
- They can allow you to manage your finances by paying for goods or services later on
- They can prove especially useful in instances where you might need emergency funds and cannot come up with the money upfront
- 0% purchase credit cards mean that you do not have to pay back any interest for a specific period
- Many credit cards offer cashback or rewards for spending as you normally would
- When using one, you are protected under Section 75 of the Consumer Credit Act to sort out any disputes with sellers or service providers
- If used responsibly, credit cards can have a positive impact on your credit score
- If you are struggling to repay, you have the option to repay the loan in installments
Should I get more than one credit card?
It is important to remember that just because you might be able to own multiple credit cards, this does not necessarily mean that you should.
Furthermore, just because you can own multiple credit cards does not mean that you will necessarily be approved for all of them. This may especially apply if you have already missed loan payments previously - making you a risk for potential credit card lenders. As such, if you already have a low credit score, it is worth really considering whether you should have multiple credit cards and whether you could pay them off fully and effectively.
However, in some instances, it is certainly worth having multiple credit cards - especially if each card serves a different purchase. For instance, using a cashback or rewards card for everyday payments if you are able to pay it off, and a 0% purchase credit card for large purchases to spread the cost with no interest.
Does having a credit card affect my credit score, and vice versa?
Yes, having a credit card will affect your credit score. Further, your credit score can additionally impact your chances of getting a credit card.
It is thus important to check your credit score before applying for a credit card. A low score means that potential lenders will likely view you as a credit risk, and will not accept you. A high credit score will open up the best rates, terms and interest-free credit card deals.
Furthermore, on the other hand, if you get a credit card and do not pay back the payments each month in full by the agreed date, then this can negatively impact your credit score. As such, it can impact applications for future finances, such as mortgages and car insurance deals.
How does getting a credit card compare to alternatives?
There are a number of alternatives that you should consider before making the decision to get a credit card. These include overdrafts, personal loans, prepaid cards and secured loans.
It will essentially depend on what you require credit for, and how best you plan on paying it back. For instance, while credit cards are great for planned purchases, overdrafts can be used in instances where you have large unexpected payments coming out of your current account that you will be able to pay off quickly.
A further alternative is a personal loan, which is often preferred for one-time, larger purchases. This is because they typically have lower rates than credit cards and monthly repayment rates.
What are the main downfalls of getting a credit card?
If you are already struggling financially, it is unlikely that getting a credit card will make the situation any better, and in fact, it can have the potential to make things far worse.
The main risks of getting a credit card that you should consider include the following:
- Potential debt cycles if you cannot pay back what you borrow, as well as being hit with higher interest rates which would make it even more difficult to pay off
- Negatively impacting your credit score if you miss repeated payments which would make it harder to get credit or borrowed finance in the future
- Additional fees as well as interest rates, for instance if you go over your credit limit or miss a payment then you may owe your bank even more
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