Perhaps you’re young and new to finance and are just starting to look into credit cards and what they offer? Or maybe you’re a more seasoned spender but just want a refresher on exactly how credit cards work? However you’ve stumbled across this blog, it’s our aim to give you a brief, back-to-basics explanation of what a credit card is, how it works and the pros and cons of using one.
A credit card offers a flexible way to pay for goods and services, based on the user’s promise to pay for the transaction at the end of the month. Once issued with the card, the holder is given a credit limit, which the maximum amount of money that can be spend within one calendar month. People can choose to use credit cards for their spending due to the fact they offer better protection than cash, checks or bank account transfers. As part of the Consumer Credit Act legislation, you’re much more likely to get your money back if a supplier (for example, a travel firm) goes bust if you’ve used a credit card.
Of course, as with any financial product, there are pros and cons to consider – although in most cases, the key is to get the card with the features that most suit the user.
Some common pros include that they:
- Offer a flexible way to borrow money
- Can boast rewards, such as cash-back or air-miles
- Give you more protection than debit cards or cash
- Offer the chance to clear your outstanding balances on other cards using a balance transfer credit card
On the other hand, some of the cons are:
- If not used properly, they can wind up putting the user in debt. The fact that interest is incurred on this debt can be particularly problematic, as it can make it harder and harder to get back in the black as time moves on.
- Loyalty isn’t rewarded – the longer you stay with one card, the worst its deals and rates are likely to be. New customers on introductory deals usually get the best bonuses and 0% deals, so it’s always worth comparing credit cards once your initial period is over to make sure you’re getting the best deal.
Ultimately, the way you use a credit card will determine whether it’s a good move for your finances – use them wisely and they could end up saving you money each month, use them recklessly and you can expect the opposite effect in some cases.