CreditCards

How to use credit cards responsibly

Credit cards can be a fantastic tool for financially savvy individuals. They allow you to spend money you don’t yet have, which means you can buy more expensive things and spread the cost over time. Plus, they can act as a lifeline  in emergency situations when you need money quickly. Regular users can rack up the rewards, getting benefits such as cashback, airline points or hotel memberships just for putting their standard expenses through on credit.

It can be tempting to switch to credit cards as your default method of payment. But beware – when used irresponsibly, they can impact your credit rating, which in turn makes it harder for you to get a mortgage or any other type of loan. In some cases, even potential employers will run a credit check, with a bad credit score reducing your chances of a job offer. So how can you use this form of payment in a responsible way? Let’s take a look.

Have a plan for paying them off

Whilst credit cards can help you get to payday, it’s important to always know how you’ll pay off any debt you take on. Will you allocate a portion of your monthly earnings towards paying for the item, or will you pay it off in full once your salary comes in?

Missing payments altogether or paying late can have a detrimental effect on your credit score, even if you eventually get things sorted. Additionally, you may receive a late fine, or see your interest rate rise. Only spend what you can afford, without being tempted to splash out on items just because you want them. If you do miss a payment by accident, reach out to your card provider for help.

Make more than the minimum payment

Credit cards come with a minimum payment – a smaller amount that you can pay off each month to avoid missing a payment. This can be handy if you’re strapped for cash one month, but it shouldn’t be your long-term strategy. Not only does paying more than the minimum demonstrate to the lender that you can manage your money, but you’ll reduce the amount you pay overall, because of interest.

Paying down your balances also means you’ll reduce your credit utilisation ratio, a term which refers to the amount of credit you’re using. Keeping this below 30% can boost your credit score and give you a better chance of being accepted for other cards or loans in the future.

Don’t use them for cash

Although you can withdraw cash on your credit card, you shouldn’t unless it’s an emergency and you can’t pay with a card. Not only will you be charged a high fee, but it can also indicate to your bank that you’re acting irresponsibly and can’t afford your daily expenditures, especially now most things can be purchased with a card.

It’s best to keep an emergency fund in your bank account that you can access immediately for situations where you do need cash. Thanks to mobile banking, most lenders allow you to move funds from a savings account to a current account instantly, so you can then withdraw the cash you need.

Be sensible with your spending

Credit cards can give you great flexibility, but you need to use them responsibly, otherwise you’ll get into financial trouble quickly. If you’re unsure if having one is right for you, start with a small credit limit, and set up automatic payments from your current account so that you never miss a deadline.