March 24, 2022
Credit cards are very convenient and can improve your financial health and creditworthiness. But they also come with a set of drawbacks, making the prospect of having a credit card seem confusing. So should I get a credit card? Our guide addresses what credit cards are, how they work, the pros and cons of having one, and how to get one.
What Is a Credit Card?
A credit card is a physical card issued by a bank or credit card provider that allows you to borrow funds for various purposes. Essentially, a credit card is a type of loan or, more specifically, a revolving credit.
Getting a credit card means you’re given a credit limit, which is reduced whenever you charge something to the card. As soon as the card’s total amount is repaid, the user can continue borrowing up to their credit limit again, without going through another loan process—hence a ‘revolving line of credit’.
The origin of credit cards can be seen in the 1920s department stores, where loyal customers were issued cards they could shop with. But the first credit card as we know it was issued in 1950 by Diners Club, and many have been reaping the benefits of a credit card ever since.
|DID YOU KNOW? The magnetic stripe on credit cards was invented in the 1960s. The strip allows retailers to read the card directly instead of making an imprint for their records.
How Credit Cards Work
A credit card is a thin, rectangular piece of plastic with a magnetic strip attached to its surface and displays a set of numbers on the front of the card, identifying the bank account and network on which it operates.
If you plan on getting a credit card in the UK, you need to know how the process works. Whenever you make a purchase, the transaction details are sent to the retailer’s bank. Then, the bank needs to get authorization from the credit card network to process the transaction. The card issuer then needs to verify the information and approve or decline the transaction.
When the transaction is approved, the card balance is reduced. At the end of the billing cycle, the issuer will send you a statement showing all transactions, the old and the new balance, and the minimum payment.
How Do Credit Card Payments Work?
Knowing how credit card payments work is essential in seeing if a card would benefit you and the best place to obtain one. Do I need a credit card? And should I get a credit card from a UK bank or a credit card provider? In checking which credit card to apply for, consider the provider’s grace period for payments, which refers to the period between the date of the purchase and the due date listed on the statement. If you pay the total amount of your bill by the due date, you won’t need to pay any interest charges.
When you don’t pay the total amount, you carry over the balance into the next month, and interest will accrue. You need to make at least the minimum payment each month, at least 1% of the balance.
Keep in mind, as well, that having a credit card could boost your credit score but could also hurt it if you don’t make regular, timely payments.
|DID YOU KNOW? When applying for a credit card, be aware of the Annual Percentage Rate (APR), which includes the interest rate and all other costs and fees calculated annually. The APR, however, is not charged on credit cards only; it’s also imposed on unsecured and secured loans.
Should I Get a Credit Card?
Credit cards have good sides and bad; therefore, deciding whether or not to get one can be difficult. So we’ve listed the following pros and cons of having a card to help you with your decision.
Advantages of Credit Cards
The following list presents six solid reasons for you to consider before applying for a credit card.
#1 Additional Payment Option
So why get a credit card? One reason is that you’ll have an additional payment option at your disposal. If you’re out of cash or your debit card is empty, your credit card can be your safety net.
#2 Covers Professional Expenses
If you don’t have a company-issued card for your job-related expenses, it’s a good idea to have a personal card that you use for any unforeseen expenses. Having a personal credit card for business expenses can help you track how much you’ve spent and make the reimbursement process more manageable.
#3 Interest-Free Borrowing
One of the best credit card benefits in the UK is borrowing without interest. This, however, is only true if you pay back the total amount you’ve spent each month. Some credit card issuers offer promotional interest-free periods, allowing you to make only minimum payments with no interest.
Most credit card issuers offer cash back rewards, airline miles, discounted stays, etc. You can consider obtaining a credit card just for the rewards.
#5 Emergency Fund
Is it good to have a credit card for emergencies? Yes. Even though you should have personal funds set aside, they won’t always be enough. With a credit card, you could fall back on your balance.
#6 Build Credit History
Credit cards are excellent tools for building credit. If you use your card wisely and make all your payments on time, you can boost your credit score and establish a good credit history. Having a good credit history and more than the average credit score is vital because it can make the application process for future loans much easier.
Disadvantages of Credit Cards
After considering the advantages, you may still ask: Is it worth getting a credit card? Consider the following five disadvantages of having a credit card.
#1 High-Interest Rates
Credit cards have high interest rates. So if you’re only making the minimum payment each month, be prepared to part with a significant amount of your money. In this case, it’s better to consider another type of loan.
One of the dangers of having credit cards is overspending, i.e., spending more than you can afford. Racking up charges without having the means to repay leads to the accumulation of credit card debt.
#3 Annual Fees
Is a credit card a good idea when considering the annual fees? If you pay the total amount on time each month, the card issuer cannot charge you interest, but they will still charge fees for using the card. Sometimes these fees can be quite high—so make sure they’re worth paying.
#4 Cash Withdrawal Fees
You shouldn’t consider withdrawing cash from your credit card, even if you’re strapped for cash. Cash withdrawal fees are incredibly high, and you may have trouble paying your next bill. Such reckless actions can be detrimental to your finances and, in extreme cases, even lead to bankruptcy.
#5 Credit Score Damage
Are credit cards bad for your credit? They can be if you don’t manage them responsibly. If you’re late or miss a payment, your credit score can plunge, making it more challenging to be approved for another card or a loan in the future.
Considering the advantages and disadvantages of credit cards will help you decide if a credit card is a good choice for you. If you’re not good with money and tend to overspend, we advise against getting a credit card. If you are responsible and think you can manage more money, apply for one.
But why should I get a credit card if I don’t need it? Many obtain a card for the rewards and the credit score boost accompanying it.
|DID YOU KNOW? Brits like to use cards to pay for purchases. Data from 2018 showed 20.4 billion transactions for the year, with £800 billion spent on credit and debit cards.
|Credit cards are a type of loan known as ‘revolving lines of credit’.
|When someone makes a purchase, their credit card balance is reduced.
|A credit card allows interest-free borrowing and can boost credit scores.
|Credit card issuers charge high interest rates for cash withdrawals and when the balance isn’t paid in full.
How to Get a Credit Card in the UK
What do you need to get a credit card? First, requirements for obtaining a card specify that you must:
- Be 18 years old
- Live in the UK
- Be employed
You can go through the application process in person, by phone, post, or online. Applying online is the most straightforward way, as you can quickly research card providers, go to the website of the one you like, and fill out the application.
Almost all card providers require the following information:
- Name and address
- Date of birth
- Income and employment status
But again, before going through the process, ask yourself, do you need a credit card and why? Consider all the pros and cons again before submitting your application. And make sure to check the APR, annual fees, and due dates—there could be something hidden in the fine print.
After applying, wait to be notified if you’ve been approved. (Some providers notify you in minutes.)
|DID YOU KNOW? The UK has a severe debt problem. The average debt per household is £12,800, including credit card debt, personal loans, car loans, and other unsecured debt.
How to Use a Credit Card Wisely
When should I get a credit card? First and foremost, you must commit to using the card wisely and responsibly, which includes the following guidelines.
- Planned purchases only
- No overspending
- Keep 40% of the credit limit
- Don’t miss payments or due dates
- Regularly check your credit report
- Ensure the retailer is legitimate before paying
If you follow these simple tips, you’ll have a great card experience, avoid debt, and manage to build your credit in the process.
|DID YOU KNOW? Before cancelling a credit card, you need to repay your balance in full. And cancel any direct debit cards connected to it to avoid uncancelled subscription charges.
Are credit cards good? Yes, they can be an excellent tool for building credit and improving your financial situation. Credit cards, however, are double-edged swords. There can be severe repercussions if you’re not responsible with your card. But before applying for a credit card, consider all the advantages and disadvantages and decide if it’s a good fit for you and your finances.
Credit cards are beneficial when used responsibly. They can improve credit scores, come with various rewards, and allow interest-free borrowing.
High interest rates are the biggest downside to a credit card. If you don’t pay the total balance each month, you’ll face incredibly high interest charges.
When should I get a credit card is a common question. The best time to get a credit card is when you’re confident that you won’t overspend and have enough money to pay the total balance each month.