The Good & Bad of Credit Cards

Updated: December 05, 2023 Author:

Key takeaways:

  • Credit cards can help to rebuild your credit score after financial difficulties
  • Credit-builder cards are available for people with poorer credit scores
  • You can use credit cards to consolidate other debts and lower your monthly payments
  • Using a credit card also gives you more consumer protections
  • It’s important to understand credit card repayment rules and restrictions
  • Misusing a credit card can have a negative impact on your credit score

    A credit card lets you make purchases or, in some cases, borrow money and repay the balance over time, with interest. Handled well, they can be a highly convenient way of managing your finances. But it’s important to understand the good and bad of credit cards so that you use them correctly and don’t get tripped up by common pitfalls.

    Credit cards can also be a powerful tool for building your credit score but only if they’re used correctly. Missing credit card repayments can have the opposite effect.

    What Are the Advantages of a Credit Card?

    Credit cards can help you to manage your finances by allowing you to spread the cost of an unexpected bill or other purchase. There are also other, often lesser-known benefits to using a credit card:

    • Build your credit score: Even if you have bad credit, you can get credit-builder credit cards that typically have lower spending limits and higher interest rates. Using these cards responsibly can help to rebuild your credit score after financial difficulties.
    • Get 0% interest on purchases: Some credit cards let you spend online or in-store with zero interest, provided that you meet your repayments each month.
    • Consolidate debts: With a balance transfer credit card, you can combine multiple debts into a single credit card balance. This can often reduce the amount you’re paying towards your debt each month. In some cases, you can do this with a zero-interest offer, which simultaneously saves you money.
    • Get purchase protection: In the United Kingdom, something known as Section 75 in the Consumer Credit Act means that your credit card company is jointly responsible for purchases made with your card if they fall through. Even if the company you dealt with goes out of business, your credit card provider is responsible for refunding you.

    What Are the Disadvantages of a Credit Card?

    Like any form of credit, managing your credit card responsibly is key to getting the most out of it. The good and bad of credit cards includes several drawbacks that you should understand before opening your first account:

    • Added fees: Make sure you check the fees associated with making a balance transfer. They’re not always free, and these fees can inflate your balance if you consolidate multiple debts. There may be other fees too, such as late payment charges.
    • Restrictions on usage: You typically shouldn’t withdraw money using a credit card. This is a common pitfall that affects people who are new to using a credit card. Most card providers will charge fees and apply immediate interest to any cash withdrawals. There may be other restrictions too, such as not being able to use your card abroad.
    • High interest rates: Interest rates can vary largely from one card to the next. A high interest rate applied to a high balance can result in monthly interest charges that make your debt hard to repay. Always understand how your interest rate will affect your debt and the time it’ll take to clear your debt.
    • Complicated rules: If you spend money on a credit card that has an existing interest-free debt, your repayments are likely to be applied to your interest-free period first. This can result in interest that quickly adds up. This is just one of a number of complicated repayment rules that affect most credit cards.

    What’s the Best Way to Manage a Credit Card?

    The best way to get started with a credit card is to research the different options that are available to you. Balance transfer credit cards are best for consolidating debts from other cards or certain types of loans – but not every loan will accept a balance transfer. In these cases, you’d be better off with a money transfer credit card.

    You should also make sure that you:

    • Pay at least the minimum each month: The more you can pay each month, the better. This will reduce the amount of interest you pay overall. At the very least, you need to make sure that you meet your minimum repayments so that you don’t damage your credit score.
    • Set up a direct debit: Having a direct debit in place to automatically pay your credit card each month ensures that you won’t forget a repayment. A missed payment is another factor that can lower your credit score and affect your creditworthiness.
    • Limit your credit card applications: Each new credit card application will leave a hard search on your credit report. This is normal for any new application, but having too many hard searches in a short period of time can make you appear desperate to new lenders and will thus lower your chances of getting credit in the near future.

    When Do I Pay My Credit Card?

    You might have seen that you can get up to 56 days’ interest-free credit with many credit cards. This is the “best case scenario,” in which you make a purchase immediately after your monthly statement is generated for the previous month. You’ll then have up to 56 days before that purchase is added to your next statement and the bill becomes due.

    But the best way to manage your credit card responsibly and build your credit score is by paying off the balance in full each month. This also ensures that you aren’t living beyond your means and racking up what could become an unmanageable debt.