Credit cards can be useful for borrowing small amounts of money, for a short period of time. But before you get one, it's worth weighing up the pros and cons.
If you decide a credit card's for you, learn how to manage it successfully – without damaging your finances or harming your credit score.
Pros of having a credit card
Convenience. Credit cards are accepted at more places than prepaid cards and charge cards. And you often need one to book things like rental cars, as some companies don’t accept debit cards when taking a deposit.
Reusable credit. Credit cards are a type of ‘revolving credit’. That means you can borrow money again, after you’ve already paid back. This makes credit cards suitable for borrowing small amounts for everyday expenses. If you’ve had an unusually expensive month and can’t afford something you need, a credit card can tide you over until next time you get paid.
Flexible payments. You have to make a regular minimum payment on credit cards. But above that, you can choose how much to pay off each month. It’s best to pay off as much as you can, and as soon as you can, to avoid being charged interest.
Protection on purchases. When you buy something that costs between £100 and £30,000 on your credit card, the purchase is protected under section 75 of the Consumer Credit Act. This means you may be able to get your money back from your credit card provider if something goes wrong – like receiving a faulty item or the seller going out of business.
Perks! Some credit cards offer cashback, store discounts, and rewards like air miles or points. You usually need a good credit score to get one of these cards. You might also have to pay an annual or monthly fee – so make sure the benefits outweigh the costs.
Building your credit score. A low credit score makes it harder to get accepted for credit. Particularly if you want a good interest rate or to borrow a large amount.
Some credit cards are designed to help you improve your score. They normally have low limits and high interest rates – but the idea is that you can get a better deal once your score increases. Just make sure you pay the bills in full every month, or your score is likely to go down instead of up.
Cons of having a credit card
High interest rates. Credit cards typically have higher interest rates than many other types of credit, like loans. This means it costs more to borrow money using a credit card. So, try not to use credit cards for long-term borrowing. Your credit card company normally won’t charge you any interest if you pay off the card in full every month.
Snowballing debt. Many credit card providers use compound interest. This means they charge interest on any interest you already owe. In other words, your debt can grow by itself – and the longer you take to pay it off, the faster it’ll grow.
Additional fees. Credit cards often charge a fee for:
Setting up your credit card account
Spending over your credit limit
Missing a payment
Access to rewards, cashback and other perks
Taking out money at an ATM
Spending or withdrawing money abroad
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Higher interest rates for cash. There’s often a higher interest rate for withdrawing money or buying a foreign currency on your credit card – even if you pay it off before the end of month. Your credit score may go down too. You may be better off with a loan or overdraft if you want to borrow money and take it out as cash. (Did you know, Monzo offers overdrafts?)
Affects your credit score. A well-managed credit card can improve your credit score, but an outstanding balance can lower it. Plus, applying for a credit card will reduce your score temporarily – even if you don’t get accepted.
How to manage a credit card
Decided a credit card is right for you? We’ve got some solid tips to help you protect your finances and credit score:
Always meet the minimum payment. Consider setting up a Direct Debit from your current account to your credit card, so you never forget a repayment. Just make sure you have enough money in the bank when the payment comes out.
If you use Monzo, you can see your Direct Debits in the Payments tab in your app. And we’ll show you upcoming Direct Debits the day before they come out of your account.
See and manage your Direct Debits easily, from your Monzo app.
Stick to your credit limit. See if you can set up alerts to let you know when you're getting close to it. Try not to use your full limit, as this can put you in long-term debt and damage your credit score.
Watch out for rate changes. Some companies give you a low or 0% interest rate when you first take out a credit card. But your rate can go up a lot once the introductory period has ended. You could look at changing to a better deal when this happens, but you may be charged an early repayment fee.
Avoid credit card cheques. Credit card cheques are like normal cheques, but the money comes from your credit card instead of your bank account. They’re rare these days and it’s best not to ask for them. They charge a higher interest rate and extra fees, and you won’t have the same protection under section 75.
Watch out for theft and scams. Contact your provider immediately if your credit card is lost or stolen. Keep an eye out for unusual transactions on your credit card statement – and make sure you know how to protect yourself from identity fraud and theft.
You may be able to get an arranged overdraft with Monzo. Get started by downloading Monzo first.