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.

Debt Consolidation: The Pros and Cons

Debt consolidation is frequently a good way to make multiple, difficult debts more manageable. If you are struggling to repay your debts or simply to keep track of multiple sources of borrowing, debt consolidation can be a way to put it all together into a single, manageable payment that you have room for in your monthly budget.

There are many advantages to debt consolidation, but there are also a few disadvantages. In order to understand whether you will benefit from taking out a consolidation loan, it is important to understand these factors fully.

The Pros of Debt Consolidation

The main factor that works in favour of debt consolidation loans is simply the fact that, for those who currently hold multiple debts, everything will now be in one place. You will not have to keep track of multiple credit products with differing interest rates and, if you have been having trouble repaying, you won’t need to worry about prioritisation. You will make a single payment to a single lender, and you will hold only one debt with a single interest rate.

If you have been having trouble handling multiple debts, a consolidation loan can also be a chance to effectively renegotiate things. You may be able to obtain a consolidation loan that not only combines all your debts but works out a new payment plan that will be more manageable in your current circumstances.

If you take out a consolidation loan, it is likely that your credit rating will also improve. Other loan accounts and credit cards will be closed down and replaced with just one. To lenders looking at your credit report, this is a sign that you are managing your debts more responsibly and so you look like a better, lower-risk borrower.

The Cons of Consolidation Loans

There are really few drawbacks to consolidation loans, provided you are in a situation that makes it an appropriate move in the first place. However, they are not completely without their potential disadvantages.

The main disadvantage is that they can result in paying higher interest on some of your loans. For example, credit card debt that is moved to a consolidation loan will be subject to the interest rate of that loan, while it might otherwise have been possible to transfer that debt to a new card that offers 0% on balance transfers.

Some consolidation loans also include penalties for paying back early. If you believe that you might be able to pay back your loan ahead of time, check whether there are any such penalties before taking a package out.