Considering just how nervous everyone is at the moment about job security, the rise in VAT and spiralling fuel and food costs, applying for a credit card seems to be a foolhardy exercise that will only lead to more personal debt. This couldn’t be further from the truth. A credit card isn’t a licence to go deeper into debt – it’s a practical way to manage your money in a modern economy.
If used incorrectly, a credit card can become an additional financial burden. But used in the right way, it offers you a practical solution to managing your day to day finances and even lets you treat yourself to something special occasionally. The key is in the details. Before you apply for a credit card, there are a few things to take into consideration.
1. What is your current level of personal debt?
According to statistics released by the Credit Action Union for March 2011, the average household debt in the UK is £8,416 (excluding mortgages). Before you take out a credit card, it’s wise to do a financial ‘health check’ to see how your money is distributed. Does your income cover all your priority bills such as utilities, rent or mortgage repayments? Do you have outstanding debts that are accumulating interest as well as repayment charges? Remember that with a credit card you will often get a ‘grace’ period where you will not be paying any interest. If you want to reduce your monthly outgoings, consolidating an existing debt that is subject to interest charges over to an interest-free or low rate credit card could give you more control over your money.
2. What do you want a credit card for?
One of the most common uses for credit cards is as a ‘reserve fund’ that can be used occasionally. If you have low levels of personal debt or are debt-free, a card that is only used occasionally and is paid off in full every month is a good way of paying for emergencies such as car repairs or last minute holiday bookings. Having this flexibility means that you can often save a considerable amount of money on purchases and if necessary, spread the cost over a few months.
3. Can you pay it back in full at the end of the month?
Credit card users who only pay back the minimum amount each month will find that, once the interest-free period ends, the amount they owe starts to mount up through interest charges. If you can pay back the full amount at the end of each month, you can avoid those charges and manage your finances with greater efficiency.
4. What kind of credit card do you want?
With so many different types of credit card on offer, it can be confusing to try and pick the one that’s right for you. If you want to do a balance transfer, look for a card that offers an extended interest-free period that will allow you to pay off more of your existing debt. If you want a credit card for purchases, again look for low rate or interest-free cards. Some of these will also have extra incentives such as cashback on purchases or special offers. Make sure though, that if you use a card for a balance transfer you avoid putting additional purchases on the same card.
5. What alternatives are available?
While a credit card is a great way to manage your personal finances, sometimes other alternatives such as bank loans may be more practical. If you want to make a ‘high-ticket’ purchase such as a new television or a car then a bank loan may give you more flexibility and represent a cheaper option to a card. If you want to keep your personal debt levels down to a minimum then a debit card may be the answer. But for most situations, a credit card represents the best way to spread the cost of your day to day living and, used wisely, can be a real asset to your finances.
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