The following guest post is from United Kingdom writer (Les Roberts, and so a small italicized section of the following article pertains just to the UK (section 75 of the Consumer Credit Act 1974), the rest of the article applies to all.
Many people view credit cards as the monetary equivalent of an addictive drug, once you start using them you will want to use them more and more until you have become totally dependent upon them and your life is in tatters, financially at least.
Which is one way of looking at it!
But, although there is no doubt that credit cards do send some people on a downward spiral financially, that’s not to say that there is a time and a place for credit cards and, if used correctly, they can be a great asset to personal finance planning.
So below are five good reasons to put it on plastic.
Reduce Existing Debts
Balance transfers are a great way to save money and can also help you pay off an existing balance sooner than expected. This is because many lenders offer interest free periods to new customers and so you can transfer the balance of an existing credit card onto a new card and pay no interest for the duration of the offer.
These interest free offers generally last between nine and 18 months depending upon the lender and so great savings can be made. In addition, any repayments you make are taken directly off the balance with no extra interest added and so, in theory, you should be able to repay the debt sooner.
Spread the Cost
If you need to make a major purchase but cannot afford to pay for it all in one go then a credit card enables you to spread the cost over a period of time. This is a great way to manage your cash flow but you need to make sure that you have the best card available for this purpose else you may end up paying well over the odds in interest fees.
So if you are to use a credit card for this purpose then it is best to try to get one that offers zero per cent interest for as long a period as possible. This means that any repayments that you make will be taken directly from the cost of your purchase and will not be passed on to the lender as interest payments.
If this is not an option then try to get a card with the lowest annual percentage rate (APR) available so you are paying a little out in interest as possible.
Maintain a Good Credit Score
In recent years credit companies have been a lot more selective about who they lend to, so it is imperative that you maintain a good credit score. And using a credit card regularly is a great way to do this.
If you use your credit card for everyday purchases, such as fuel and food, and pay off the balance at the end of each month, then this will show that you are a responsible borrower and lenders will be prepared to keep on giving you credit. But it is imperative that you keep up with your repayments as a missed payment will show up on your credit file and could have a negative impact on your score.
Similarly, using a credit card is a good way to rebuild your credit rating if you have a low score due to having never used credit before or because you have mismanaged your credit in the past. Once again, the important thing to remember is to pay off your balance in full at the end of each month as this will ensure that you are seen as a responsible borrower and will rebuild your score more quickly. In addition, if you pay the balance off in full at the end of each month it will mean you avoid costly APR charges on your purchases.
Many credit card companies now offer customers incentives, such as cash back or air miles, to ensure that they regularly use their particular card. So, once again, if you use your credit card for everyday purchases and then pay off the balance in full at the end of each month then you can earn as much as five per cent cash on your purchase. This really is money for nothing.
Alternatively, air miles may be of more value to you if you are a frequent traveler so if you use an airmiles credit card then you can benefit from discounted, or even free, flights just for spending on your credit card.
You just need to have the right cards and use them in the right way.
Protect Your Purchases
Paying with a credit card generally offers you a greater level of purchase protection than paying with cash or a debit card.
Under section 75 of the Consumer Credit Act 1974 (for United Kingdom) your lender becomes jointly liable with the seller as soon as you spend between £1,000 and £30,000 on your credit card.
This means that should any goods you purchase on your card be damaged, faulty or not be delivered to you, then you can ask your credit card provider for a refund. Although this is something that you would normally take up with the trader, this Act simply ensures that you have another avenue to do go down should you have no joy from the seller.
So, if used correctly, there are a number of occasions when it is more beneficial to use a credit card. But it is vital that you use your card correctly and this usually means paying off the balance in full at the end of each month. Use your card unwisely and you could find yourself facing a mountain of debt!
Article written by Les Roberts, credit journalist at Moneysupermarket.com.
Money Reasons here, I just want to thank Les for a great article!
Update: as mentioned in the comments, using a credit card may also help you establish or improve your credit score.