A credit card is essentially a loan that you as the cardholder can use for buying stuff. But, unlike a loan that is lent to you to be spent once and paid off once, a credit card automatically renews every month, allowing you to spend again. That’s almost all there is to it. But there are one or two golden rules; rules I have had to learn the hard way.
Pay Your Balance Off. EVERY Month
Just because you spend £500 on your credit card one month doesn’t mean the bank expects you to pay it back immediately. In fact, they would much prefer you to pay it back over a long period of time so that they can earn some fat interest on your outstanding balance.
If it’s a planned big purchase that you need to pay off over a few months, that is one thing, but if you can, set up a direct debit to clear the full balance every month. This will mean that there will mean no interest charges to pay.
This is easier said than done of course… The excitement I felt when I got my first credit card and the prospect of what I considered to be free money led me to a series of ill-advised purchases and a debt that took the best part of a year to clear and obver £100 of interest. Lesson learned.
Be Aware Of Fees
There is no such thing as a free lunch. Credit card providers simply wouldn’t offer one to you if everyone dutifully paid off their balances in full every month and never paid any additional fees. But there are some hidden charges to be aware of and to avoid.
Taking cash out of an ATM using a credit card is a very expensive activity. Unless it’s an emergency, never do this, or you will be hit by a very unpalatable fee plus interest charges. I once used my credit card to buy some euros in Spain. I later learned that this was treated as an ATM cash withdrawal, for which I was punished accordingly.
Using your card abroad can also lead to a punchy fees on foreign transactions and exchange rates. Some cards are better than others for using on holiday like this one, but be aware of the charges for your specific card.
If you follow these rules, you can’t go far wrong.
If you are on top of things, you might then want to take advantage of the rewards that credit cards can sometimes offer. Some cards offer cashback on your monthly bill, others offer airmiles or loyalty points. If you are already collecting points with a retailer you frequently use, it may make sense to choose a credit card that allows you build up more points.
Personally, I use the British Airways American Express card which builds miles and gives to you a free flight if you spend over £20K in a year. In my experience, this can lead to more spending as you frantically try to reach the annual target. It makes me feel only slightly less frivolous to know that i’m not the only one.