Tips for Better Credit Card Usage

Credit cards can be a great financial aid, but like any form of borrowing they have to be used well to avoid problem debts as well as to simply make sure that your credit is as cost-effective as possible. Here are a few ways you can optimise your credit card spending:

Don’t Use Them Unnecessarily

A credit card is not free money. It is not even a free “advance” on money you are going to repay later – unless you have 0% on purchases and repay before this expires of course. It is very easy to underestimate interest and the cost that it represents in real terms, writing it off as “a little bit extra” on each repayment. However, interest can mount up a lot more than most people realise over time. Keep your credit card for the times where you need it, or can see a clear benefit in using it.

Don’t Maintain Debts Long-Term

Managed properly, credit cards are a fantastic source of short- and medium-term borrowing, but over time they can really get costly. Recent research from the FCA has shown that well over a million consumers are maintaining debts for several years and making only the minimum repayments. The financial regulator was concerned at the cost of interest, as well as the lack of help available from lenders. Aim to clear your debts as soon as you reasonably can and not maintain debts longer-term.

Switch When Introductory Deals Run Out

Like many services such as insurance, credit cards are something you should switch regularly. Introductory offers such as 0% periods can be great, but the price increase when these offers run out can be steep. The simplest solution is simply to take out a new card with a new introductory offer, transferring any remaining balance at the most favourable rate you can. When you take out a new card, make sure you actually cancel your old one rather than simply ceasing to use it. Not doing so can harm your credit rating, as it looks to lenders like you are juggling multiple cards.

Use it in Place of More Expensive Finance

One place where credit cards excel is in replacing more expensive finance options. For example, a credit card, if available, will be astronomically cheaper than most payday loans. Alternatively, there are other situations which we might not think of as borrowing but, really, are. For example, do you pay for your car insurance or road tax in instalments? If so, you are effectively being offered finance, and the total you pay will be more than if you had paid in a single lump sum. If you pay it in full using a credit card with a year or more of 0% on purchases, then you can spread the cost without paying extra by paying off your credit card balance in instalments over the same period.

Taking Out a Loan: Important Things to Consider

The difference between a problem debt and a useful financial tool can sometimes be whether you have made the right considerations before taking out a loan. Some of the most important things to consider are:

Alternatives

The first thing to think about is whether you really need to take out credit. Because of interest, you will end up repaying more than you borrow (with 0% credit cards being the most prominent exception), and usually the difference will be significant. That is how lenders are able to make money after all. If you could afford to use your own money to meet whatever expense you are faced with and would just prefer not to, you may want to think again as you will be better off in the long run. If you have any other alternative available, such as borrowing from a spouse or close family member, this may also be preferable. The more strain a loan is likely to put on your finances, the more important this step becomes. If you will have trouble making the repayments, or if it will leave you with little spare income for unexpected expenses, the more taking out a loan should be considered a last resort.

Types of Loan

If you have decided that a loan is your best or only option, the next step is to think about what kind of credit you wish to take out. This can make a huge difference to the kinds of interest rates that are available to you and therefore the amount you repay in the end. To take an extreme example, payday loans – which are almost always something to avoid – could come with an interest rate of well over 1,000% but the same amount may be available with a longer repayment period through a 0% credit card. In between these two extremes are things like “standard” personal loans and peer-to-peer loans.

Shopping Around

Always shop around for the best rate. Even within a single kind of product, interest rates and repayment terms can vary massively, so there is a lot to be gained from getting the best deal. As with insurance products and utility providers, online comparison websites are your best friends when you come to this step. No single comparison sites covers every lender, and some may even have access to slightly different deals from the same lender, so for best results you should use two or three different comparison tools and then find the best deal from among them all.

Should you Ever Pay off Old Loans With New Ones?

Taking on new debts to pay off your old ones sounds like a problematic debt spiral, and in some circumstances it can be exactly that. In other situations, though, the idea can start to look quite attractive and like it could potentially help make your situation more manageable. Is it ever a good idea to pay off old debts with new?

The Advantages

In principle, there will be an advantage to paying off an old debt with a new one if you can get a better deal on your new loan than you are getting from your current lender. Paying off one loan with a newer one that has a lower rate of interest is, in many ways, the same as switching provider for a utility or insurance product. You simply move from one company to another, because with the new one you will pay less monthly and/or over the full term of the loan. Depending on your circumstances or needs, a better deal could mean a lower interest rate, saving money both monthly and in total, or it could mean a longer term which means you pay back more overall but have significantly lower and more manageable repayments.

This kind of situation might arise because you have held a loan for some time and better deals have come on the market. Alternatively, it may be that you didn’t get the best deal when you took out the loan, for example choosing an ultra-high-interest payday loan that you are now struggling with when you could have borrowed the same amount elsewhere at a much better rate. If you are genuinely struggling on your current deal and the new deal would be enough of an improvement to solve your problems, it is best to switch as soon as possible or your credit rating may fall and you may no longer have access to the better deal. If you are struggling with multiple debts, on the other hand, then a specialist debt consolidation service may be a better way to move what you owe and make things more manageable.

The Problems

In principle, any situation where you could get a better deal on the new loan is one where it is worth taking out a new debt to pay off an old one. In practice, however, things are not usually that simple. With the exception of credit cards, where balances can commonly and easily be transferred for fairly low fees, switching loan providers is not as simple as changing utility or insurance providers. For one thing, you may or may not be eligible to take out the second loan. There are online tools that can help you work out whether you are.

There is another major factor that affects whether you will gain from the switch. In order to switch, you will need to take out a new loan for the full settlement value of the old one, and then pay the latter off at once with the funds you have borrowed. This is where potential problems come in, as your old loan may well carry early repayment fees. It is important you look into these fees before making any switch. There may be multiple separate charges, so make sure you are aware of them all. It is only worth switching if you stand to gain more from changing deals than you will lose in early repayment charges.

Rebuild a Credit Score Damaged by Debt

If you’ve had trouble with difficult debts and managed to pay them off, you probably breathed a great big sigh of relief the moment they were clear. But while you have every right to sit back and take a welcome breather from your worries, you might soon start to think about the next challenge: rebuilding your credit score. This doesn’t have to be a rush, but it will be important in the future if you ever want to take out credit again, whether it’s a mortgage, a simple credit card, or even a finance deal on a purchase.

Fortunately, rebuilding your credit score doesn’t have to be anywhere near as stressful and difficult as dealing with problem debts. There are a few steps you can take to help put your record back together.

Take a Look

It’s understandable if you’re reluctant to look at your credit report. You know it’s going to be bad, and the debts that got you into this situation are probably not happy memories, so why go out of your way to find out just how bad it is? The truth is, however, that it’s best to know exactly where you stand and how far you have to go. Obtain a copy of your report, and keep an eye on it throughout the process to watch how it improves.

Get a Credit Card

Your credit report is basically your record as a borrower, so there is one very useful way to improve it; borrow and pay back. To build up a record as a good borrower, you need to demonstrate that you can manage and repay debts Clearly you don’t want to take out a full-on loan or anything like that, so credit cards are the way to go. Get whatever deal you can get, and start to use it. Cards for poor credit tend to have very high rates of interest, but that doesn’t have to matter. Just make sure you pay it back in full and on time each month to avoid the issue of interest. Use it to buy things you could and would have bought anyway with cash (lots of little purchases will be fine), so that you will always have the money available to pay it off right away. This will build up a record of good, responsible borrowing and boost your report.

Know What Goes on the Report

As well as looking at your credit report, it is best to make sure you know what goes onto it. If you sometimes forget to pay your bills until you receive an overdue notice, this might seem harmless enough but it goes onto your credit report and brings down your score. Other things can be used as a surprisingly simple way to improve your score, such as making sure you are registered to vote. Familiarising yourself with the kind of things that can affect your score will help you make sure you are doing all you can to bring it up.

Three Ways Not to Borrow

Sometimes, you may need to borrow in order to make ends meet. Sometimes it can seem like you have no choice but to borrow new money to pay off older debts. However, there are several kinds of borrowing that you should not consider unless completely, unavoidably necessary. The types of borrowing that you should not consider except as an absolute last resort include:

Payday Loans

Payday loans are essentially designed as short-term products, and are therefore high interest. Unless you are absolutely, 100% confident that you can pay them back when you receive your next paycheque without putting yourself in financial difficulty, steer clear. Even if you are completely certain that you can do this, there is still a strong chance you can find some alternative solution that does not carry the same high interest rates. Those who can’t pay back the loans within the (very short) terms often get caught in a spiral of taking out fresh loans to cover the old ones. This means the high interest rates designed for short-term borrowing get applied over a much longer period, and the debt becomes rapidly much harder to repay.

Secured Lending

Secured loans can be tempting because they offer better interest rates on account of being less risky for lenders. When you borrow using a secured loan, you offer some valuable object as security, usually a house or car. If you are unable to repay the loan, the lender can take possession of that object to recoup their money. This is a very significant risk. If you have trouble repaying the loan you will not just accrue interest that you will eventually have to pay, but will risk losing your car or even your home. Mortgages and car finance options are technically secured loans, but for obvious reasons these are excluded from the rule of avoiding secured lending.

Logbook Loans

Logbook loans are a very specific kind of secured loan, using your car as security. However, they deserve special mention as they are a particularly risky kind of loan to take on as the lender essentially owns your car until the loan is repaid. If you cannot keep up repayments, the lender can promptly take possession of your car without the need for a court order. On top of that, where most forms of secured lending have low interest rates, logbook loans tend to offer very high interest rates. In essence, a logbook loan amplifies the risks of any other loan secured against a vehicle and does not even offer the attractive interest rates you would usually get in return. The only factor they do have in their favour is that they are accessible to people with poor credit ratings, and unfortunately this can make them look tempting to people who are experiencing financial difficulties.