The Pros And Cons of Credit Cards

One of the easiest and most flexible ways to buy and borrow is to use a credit card. All you need to do is sign up for a card, scrawl your name on the back and off you go, right? Wrong! If you're going to be a cannier cardholder, you need to know the following:

Five pros

• With around sixty credit cards offering interest-free introductory periods on balance transfers, you can avoid paying interest on your plastic debt for up to a year.
• Even if you don't have any debts, you don't have to pay any interest on your plastic spending. By using a 0% card that doesn't charge interest on new purchases for an initial period, you can defer paying for your purchases for up to a year. Several 0% cards charge no interest on both balance transfers and new purchases, which is a double bonus!
• Buying on plastic can pay dividends! Cashback cards pay you a rebate for every purchase you make, usually in the form of an annual cheque. This reward can be as high as 1% of your spending. However, you should always pay off your bill in full, otherwise the interest that you pay dwarfs the cashback that you earn (unless it's a 0% card, too, of course).
• Buying goods on a credit card can provide you with extra protection. For example, if you buy goods or services costing between £100 and £30,000 on a credit card and these goods don't turn up, are damaged or faulty, you can claim against your card company, which "wears the supplier's shoes". Debit cards do not provide this legal protection.
• Many cards offer free insurance policies, such as extended warranties on household appliances, price protection (a refund if the price of a purchase is later reduced in a sale), purchase protection (cover for lost, damaged or stolen items) and travel accident insurance. Others offer an 'online fraud' guarantee and Internet delivery protection. Just don't pay extra for these policies.

Five cons

• If you don't use a 0% card and fail to pay off your bill in full every month, you could be charged interest at an annual rate of up to 25%. That's probably six times as high as the rate that your savings earn, so make sure that you avoid paying interest at all costs!
• If you slip up, card companies hit you with hefty fines. Overshooting your credit limit, paying late or bouncing a repayment will cost you around £25 a time. Avoid these penalties by playing by the rules! Set up a Direct Debit for at least your minimum monthly repayment, so you never miss a repayment. However, don't get into the habit of paying minimum repayments each month, as it could take you up to forty years to repay a £1,600 debt!
• Withdrawing cash on your credit card, either in a cash machine or over the counter, is a no-no. There's a steep fee, say, £3+, plus you'll pay sky-high interest from the withdrawal date until every penny of your bill is cleared. Another sneaky charge is the £35 or so for using a credit-card cheque, so don't use these unless they are fee-free.
• Using your card abroad can cost you an arm and a leg. Card companies hit you with 'currency conversion' charges, typically 2.75% of your spending, and cash withdrawal fees. With some cards, these can add almost £1 to every £15 that you spend. Ouch!
• Card issuers make huge profits from selling expensive insurance policies to cardholders. Payment protection insurance (optional life, accident, sickness and unemployment cover) is universally over-priced and packed with get-out clauses. Card protection plans (cover for lost or stolen plastic) are also overpriced and usually not worth having.

So, by avoiding the pitfalls and exploiting the benefits, you can get so much more from your flexible friends. And remember: it's a credit limit, not a target!

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