Don’t cut up your credit card

Ed Bowsher

 More and more Brits have cut up their credit cards since 2005. Six years ago, there were 70 million credit cards in circulation in the UK. By the end of last year, that number had fallen to 55.6 million.
 
Now in some ways, that's a good thing. Credit cards have enabled some consumers to go on wild, unaffordable spending sprees that lead to serious debt problems and even bankruptcy. So it's good news that outstanding credit card balances have fallen from £68 billion in 2005 to £58 billion in 2010.
 
However, if you use them correctly, credit cards are also very useful financial tools. It makes sense for most adults to have at least a couple of cards in their wallet.
 
Here's why:
 
1.  Extra consumer protection
 
For many purchases, using a credit card gives you extra protection if things go wrong. If you purchase a good for between £100 and £30,000 with a credit card, you're then protected by Section 75 of the Consumer Credit Act.
 
This gives you the right to claim against your credit card company if there is a problem with the purchase. If the goods you bought are faulty or don't turn up at all, you have a right to redress from your credit card issuer as well as the supplier.
 
The protection applies even if you only use your credit card for a small portion of the cost of the purchase. So if you bought a TV for £200, and paid £199 in cash and £1 using a credit card, you're protected by Section 75.
 
Section 75 is especially useful if the supplier goes bankrupt or disappears. If you've used a credit card, you can still get compensation. But if you've paid with cash or used a debit card, you're stuffed.
 

 
2. Cashback
 
If you have a strong credit rating, you may be able to get a cashback credit card. These cards give you money back every time you spend on your credit card.
 
If you sign up for the American Express Platinum Cashback card, you'll get 2.5% of your spending returned to you as cashback for the first three months you have the card. So if you spent £2,000 during that time, you'd get £50 back from Amex.
 
After that three-month period, you'll get 1.25% cashback on your spending, but the cashback goes back up to 2.5% for one month every year.
 
If you're a fairly big spender, this is a cracking credit card, but don't sign up if you're only going to spend a few hundred pounds on this card each year. That's because you have to pay a £25 annual fee, and you need to get a fair bit of cashback to push you into profit.
 
The other top cashback card comes from Santander. It's called the Santander 123 Cashback Credit Card. As with the Amex card, you'll have to pay an annual fee - £24 this time - but you'll also get an excellent cashback offer.
 
You'll get 3% cashback on your petrol spending, 2% on what you spend at department stores, and 1% on your supermarket spending. This card could generate a significant saving for a family that uses a car fairly heavily. Paying for petrol with the Santander card makes way more sense than using a debit card or cash.
 

 
3.  Spread out your costs

Let's imagine you want to buy something big, but you don't have enough cash to pay the whole price now. If you take out a 0% on purchases credit card, you'll only have to repay a small percentage of the cost each month. And you won't have to pay any interest on your debt for up to 15 months!
 
Right now, the two leading 0% purchases cards are the Tesco Clubcard MasterCard and the Marks & Spencer credit card.
 
Be careful though. If you haven't paid off the debt before the 0% period ends, you'll be hit by chunky interest charges — perhaps as high as 18.9%.
 
 
4.  Get rewards
 
Instead of cash, some cards give you rewards when you spend. Some cards give you airmiles, others give you points that can be redeemed for holidays, restaurant outings, trips to the cinema and more.
 
Why use cash when using a credit card can get you a nice reward?
 
5.  Interest-free period
 
When you make a purchase using a credit card, you normally get an interest-free period that lasts for between 45 and 59 days. This is a nice, little bonus that nearly all credit card users benefit from.
 
As I said at the beginning of this article, the big downside for credit cards is that debts can spiral out of control. The way to avoid that danger is to pay off your balance in full each month. Then you won't pay any interest and you won't accumulate unmanageable debt. Don't let things slip for even one month!
 
The only exception to this rule is if you have a 0% credit card. As you won't be charged any interest for a significant period, there's less pressure to pay off the debt quickly. That said, you still have to be careful. Even an interest-free debt still has to be paid off eventually.
 
So there you have it — five very good reasons why you should have a credit card, and one big danger to steer clear of.
 lovemoney