Cards on the Table and Credit Where it’s Due

Let’s talk about credit cards. Often seen as a whole heap of trouble, in fact, credit cards can be a useful financial tool. Make no mistake though, they’re still a potential source of significant financial trouble so use them carefully – and wisely.

Credit Cards Cleaned Up Their Act

Credit card companies addressed many serious flaws in the system, but care is still necessary. Back in the 90s, you could spend on your cards, then return goods for a cash refund. A recipe for (costly) disaster, which also made fraud and card theft easy. Nowadays, payments are refunded to the initial payment method.

Even more recently, credit card and loan companies were often thought to push their services – or certainly, to not be overly careful around individuals to whom they offered cards and loans. Again, credit companies’ marketing activity is closely monitored and legislated now.

Approach Credit with Caution

Nonetheless, pitfalls are still prevalent with credit card and finance. It’s vital to use cards with caution as it’s all too easy to get into trouble with credit card debt. Problems do often stem from financial mismanagement but can also be down to unexpected life events, or confusion about how credit works. Here are the main reasons for difficulties with credit card debt:

• Overspending: Too many people use credit cards to spend beyond their means, on luxuries and non-essentials. This can lead to accumulating debt that becomes unmanageable.
• Minimum Payment Trap: Making only the minimum repayment each month means interest accrues on the remaining balance, so it’s difficult to reduce.
• High Interest Rates: Credit cards typically have high interest rates, especially for borrowers with poor credit ratings or history.
• Unexpected Life Events: Life changes such as job loss, illness, or relationship breakdowns can strain finances and force reliance on credit cards.
• Poor Planning: Poor budgeting or failing to track spending can result in using credit cards to make ends meet, leading to debt accumulation.
• Using Credit Cards to Pay Other Debt: ‘Borrowing from Peter to pay Paul’ or using a credit card to pay off another, leads to a vicious circle of debt.
• Impulsive Spending: Impulse purchases, fuelled by the convenience of credit cards, can lead to spending beyond one’s ability to repay.
• Low Savings: Without a so-called rainy-day fund, people often rely on credit cards during financial crises, compounding their debt problems.
• Missing Payments: Missing payments means late fees, increased interest rates, and damage to credit scores, making it harder to manage debt.
• Not Understanding Credit Terms: Some people don’t read or fully understand the terms and conditions of their credit cards, such as how interest is calculated or when promotional rates end.

Those are the most common pitfalls. But, once you know and recognise the potential problems, you can work to avoid them.

Avoid the Pitfalls

How can you avoid problems with credit card debt?

• Budget Wisely: Track your income and expenditure to try and avoid overspending.
• Pay in Full: Try to pay off your balance in full each month, or at least to pay over and above the minimum repayment, to minimise interest charges.
• Start to Build an Emergency Fund: Save for unexpected expenses to reduce reliance on credit cards.
• Understand Your Card Terms: Learn about interest rates, fees, and promotional offers. Read the terms and conditions of any special offers.
• Ask for Help Early: If you do start struggling, contact your lender or consult a debt advice charity for free guidance.

Ensuring you understand the risks and developing good financial habits can help people avoid credit card debt trouble.

Credit Cards: Best Avoided?

But should you get a credit card? Are credit cards not best avoided altogether? Good question. A credit card can be a helpful tool, in case of emergencies for example. We’ve all had a washing machine break down or a car fail its MOT. Using a credit card to cover these costs can help bridge the gap, and make ends meet in the face of unexpected expenses.

Being accepted for a credit card and using it carefully, then paying the balance off each month, can be a big plus in building a good credit score – ideal if you’re going to apply for a mortgage.

Get Credit Wise

Perhaps you’re concerned that your credit card application will be rejected. There are steps you can take to maximise the chance of acceptance – which in turn, will pave the way for a good credit rating generally:

• Make sure you’re on the electoral register, to validate your identity and address.
• Showing a regular income direct into your current account, to reassure lenders.
• Stay on top of bills as past due payments damage your eligibility for credit. Financial responsibility has a positive impact on your credit report.
• Always make your monthly payments to improve your debt-to-income ratio.
• Don’t apply for lots of credit in a short time, this rings alarm bells with lenders.

Once you have a credit card, it’s critical to use it responsibly. Debts can mount up quickly and become a millstone around your neck, both short term and longer term with the impact on your credit score.

Credit. Know the Score

It’s important to be aware of the psychological impact of credit cards. There’s often a feeling of ‘distance’ from spending making it all too easy to overspend or to impulse buy. This means it’s easier to overspend than with cash or debit cards. Far from helping you through a tricky financial patch, this can exacerbate money worries. In turn, this causes problems in the future.

Balance transfer offers can be tempting if you already have a card. However, it’s crucial to read the terms and conditions carefully. They may incur fees, and the promotional periods inevitably end. If not managed properly, they can add to financial strain – especially if the interest rate following the promotional period is higher than expected.

Using a credit card for cash advances is always best avoided. The amount withdrawn incurs interest from the very start and there are often high fees. This is a very, very costly option.

Struggling? Know Where to Find Help

Do you have any other questions or concerns around credit card use, or debt worries? Talk to someone as soon as possible. Contact us or take a look at our support pages. Help is there for you. These problems don’t go away – but getting help and good advice will stop them from getting worse. Don’t risk your financial well-being – or its effect on your mental and even physical wellbeing.