Credit cards are wonderful creations: they can help you in a financial emergency, allow you to borrow money for free, and even pay you back on your purchases if you have a rewards card.
Using a credit card wisely can also help if you’re thinking about how to improve your credit score (opens in a new tab) or are worried about how to save money (opens in a new tab).
But you need to be careful and understand how credit cards work (opens in a new tab) before you get one. Personal Finance Analyst at Hargreaves Lansdown, Sarah Coles (opens in a new tab)says: “The right card used in the right way can be the answer to your money headaches, but the wrong card used in the wrong way can make everything much worse, and there are some things you should never use them for.”
You should never use your credit card to…
1. Take the cash off the wall
While you can use your credit card to withdraw money through an ATM, just like your debit card, it’s a bad idea as you’ll likely be charged a much higher interest rate. (opens in a new tab).
Consumer Finance Specialist at Financial Advisor Royal London, Sarah Pennells (opens in a new tab)explains: “Never, ever, use your credit card to withdraw cash. That’s because you’ll be paying interest from day one, even if you pay your credit card bill in full each month. You may also be charged a higher interest rate if you withdraw money than you pay on purchases.”
So don’t assume that if you have a 0% credit card for new purchases, you won’t be charged interest for using an ATM.
2. Buy foreign currency
A credit card can be very useful when you are abroad, especially if there is an emergency. But you shouldn’t use your credit card to fill your purse with euros or dollars.
Consumer finance specialist Sarah Pennells says: “If you use your credit card to buy holiday money, it will also be treated as a cash advance. That means you’ll be charged interest from day one, possibly for a higher type
Specialist travel credit cards charge lower rates for use overseas, but will still charge interest from day one when you buy foreign currency or use them at ATMs overseas.
3. Treats and indulgences you really can’t afford
Credit cards can be a great way to spread the cost of larger purchases, but it’s risky to use them for things you really like but can’t currently afford. Unless you have an interest-free card, you’ll be charged interest quickly and your bill will go up quickly. This one might sound like a bit of a killjoy, but it’s an important rule to follow as it can prevent you from ending up with debt that you’ll struggle to pay off.
4. Invoices and food purchases
While it’s not a problem to put the essentials on a credit card and pay off your card in full each month, if you need to pay bills for your essentials, like food, with a credit card, it can be a red flag for problems. older money
Head of Personal Finance at investment firm AJ Bell, Laura Suter (opens in a new tab)says: “Putting these essentials on a credit card isn’t a good idea if you do it regularly and have no way of paying it back. If you feel you can’t afford the basics each month, seek help from a charity such as Citizens Advice (opens in a new tab) or StepChange (opens in a new tab)who should be able to offer support.”
“The risk if you put the essentials on credit is that you can’t repay the debt and end up in a debt spiral, where the interest payments add significantly to your debt.”
Check out our guide for more tips on how to pay off debt (opens in a new tab) and the support available if you are struggling to pay the money you owe.
You must use your credit card to…
While there are some things you definitely shouldn’t use your credit card for, there are some cases where your credit card may be the best way to pay.
1. Items costing £100 or more
You may be surprised to learn that you get an extra level of consumer protection when you pay for items with a credit card.
Personal finance expert Laura Suter explains: “The protection offered by credit cards is excellent. If you spend £100 or more on something, you’ll be covered by protection called ‘section 75’, which means the credit card company is equally liable if something goes wrong with the item you’ve bought. If the items you buy don’t show up, are faulty or not what was promised, you can file a claim with your credit card company and get your money back.”
Better yet, you don’t have to put the full cost of the item on your credit card to get this protection. You can split it between cash or debit card if you don’t want to borrow the full amount.
2. If you are spending with an unknown company
If you’re shopping at a merchant you’ve never used before, it may be helpful to use a credit card to benefit from the consumer protection mentioned in the previous point.
Consumer finance specialist Sarah Pennells says: “You get much better protection if you pay by credit card than if you pay, for example, by paying online from your bank account. If the company you paid for turns out to be fake or fraudulent, you can try to get a refund directly from the credit card company.”
However you buy, make sure you know your consumer rights (opens in a new tab) in case you need to get your money back.
3. Spread the cost of large expenses
If you can get a credit card that offers 0% on new purchases for an extended period, it can be a great way to spread the cost of a big expense. Laura Suter, from finance company AJ Bell, says: “It’s great for big items you buy once a year, like a holiday, or if you have an unexpected expense and don’t have enough savings, like your washing machine or broken boiler”.
He adds: “The golden rule here is that you have a plan to pay it back, otherwise the debt can linger and the interest can mount.”
A good idea is to note when the interest-free period expires. You also need to keep the minimum payments each month, so you don’t have penalties.
4. To get rewards or cash back
It is usually not recommended to spend every day on your credit card, but there is an exception as a personal finance analyst, Sarah Coles explains: “If you are very disciplined with your credit card and know that you always have money to pay. complete and unique , a rewards credit card can help you rack up rewards on everything you spend.” This can include cash back, airline miles or grocery store discounts.
The danger is that if you don’t pay your card back in full each month, the interest charges will quickly undo the benefit of any rewards.