Many of us have a love-hate relationship with our credit cards.
There’s no knocking their convenience, the way they let you spread big payments out over a longer period of time, or even the many perks you can get such as interest-free transfers, or reward points… but despite this, many people remain wary of the plastic in their pocket.
Why? Often it’s because of some credit card ‘fact’ they once heard. A fact that is often nothing more than a myth.
The truth is, if you use your card responsibly, always make sure you pay off as much as you can afford every month and resist the temptation to treat your credit card as the “never never”, there really is nothing to fear.
And the next time you hear someone claim one of the following myths as true, be sure to point out exactly where they’re wrong…
THE MYTH: Interest becomes payable immediately after purchase
THE TRUTH: This is a common misconception about credit cards – and understanding that is the key to getting the most out of your card. Interest starts to accrue only the day after your payment is due, meaning that if you pay off your balance in full by the due date, you’ll avoid any interest whatsoever. This effectively makes your credit card a borrowing facility – which can be very useful for managing cashflow if done sensibly.
This, however, does not apply to cash withdrawals – in those instances, interest will always be charged straight away.
In addition, some cards offer 0% interest on purchases for a set amount of time – but be aware that the interest-free period begins from the date you open the credit card, not the date you first use it. Once that period ends, if you haven’t paid the balance in full, interest will accrue on a daily basis. And the same is true if you revolve a balance, i.e. carry a balance over from your previous statement: there is no interest free period for subsequent purchases.
THE TRUTH: Another widely held belief is that a wallet full of plastic may look impressive but actually damages your ability to get credit in the future. This is not strictly true – if you’re responsible with your repayments, owning multiple credit cards can actually be a rather canny financial move.
The trick is to tailor your different cards to your different needs – and so take advantage of the various incentives and rewards on offer. For example, you might want to use a 0% balance transfer offer to pay off an existing debt with one card; take out another with a cashback or rewards incentive for everyday purchases; and then a third with a fixed-term 0% spending deal for a big one-off spend, such as a holiday or home improvements.
Just be extra careful about staying on top of payments and keeping a keen eye on when any interest-free periods end. If you decide to use one card for everyday spending, paying the balance in full every month will avoid racking up debt and indicate dependable credit management.
Lenders do like to see responsible long-term arrangements too, so it’s worth keeping a long-standing account active.
THE MYTH: Carry a balance on your credit card to help your credit score
THE TRUTH: Keeping cash owing on your credit card account does nothing to help your credit score. Worse – not paying the full bill just means you’re spending more on interest every month.
This doesn’t mean you shouldn’t use your card at all, however. Keeping your account active – in other words by using your credit card – does help your score… just make sure that you’re not paying interest unnecessarily!
THE TRUTH: People like to think of a nation-wide credit blacklist, that once you’re on has you marked for life as a bad borrower. This is simply not true – every lender scores you differently. The processes they use to determine your credit score vary, and it’s not always the case that closing old cards will help.
It depends on your own personal circumstances, but long-standing accounts with good histories can be beneficial to your score – and closing an old card can actually reduce your available credit… which in turn increases the share of available credit used and thus potentially harming your score.
Also, credit scoring depends greatly on trying to predict your future behaviour. While a poor credit history will invariably count against you, having little credit history at all makes you an unknown quantity – and therefore a potential risk in lenders’ eyes.
THE MYTH: Prepaid and debit cards are the only way to avoid debt
THE TRUTH: While sticking to prepaid and debit cards can help you to avoid racking up debt, using a credit card responsibly is a better move for your credit score. Sure, if you’re the sort of person who views the slice of plastic in your wallet as some magical key to responsibility-free spending and a way of buying thousands of pounds of “free” stuff, you will of course end up in financial trouble… but then, given you’re even reading this, you’re clearly not that sort of person, right?
Prepaid and debit cards have little effect on your credit rating (unless you’re having problems managing an overdraft) – but careful and planned use of a credit card not only helps you manage your spending, but will actually improve your credit score, as it shows you can behave responsibly when you borrow money.
For more advice on credit cards and other financial products, visit www.sainsburysbank.co.uk/money-matters.