Credit cards are marvellous creations – they can help you out in a financial emergency, let you borrow money for free, and even pay you cashback for your shopping if you’ve got a reward card.
Using a credit card wisely can also help if you are thinking about how to improve your credit score or are concerned about how to save money.
But you need to take care and understand how credit cards work before you get one. Personal finance analyst at Hargreaves Lansdown, Sarah Coles, says: “The right card used the right way can be the answer to your money headaches, but the wrong card used in the wrong way can make everything far worse, and there are some things you should never use them for.”
You should never use your credit card to…
1. Take cash out of the wall
While you can use your credit card to take cash out using a cash machine, just like your debit card, it’s a bad idea, as you'll likely be charged a much higher interest rate.
Consumer finance specialist at financial advisor Royal London, Sarah Pennells, explains: “Never, ever, use your credit card for cash withdrawals. This is because you’ll pay interest from day one, even if you pay your credit card bill off in full each month. You may also be charged a higher interest rate if you take cash out than you pay on purchases.”
So don’t assume that if you’ve got a 0% for new purchases credit card, that you won’t be charged interest for using a cash machine.
2. Buy foreign currency
A credit card can come in super handy when you’re abroad – particularly if there’s 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 at a higher rate.”
Specialist travel credit cards charge lower fees for use overseas, but they will still charge interest from day one when you buy foreign currency, or use them at overseas cash machines.
3. Treats and indulgences you can’t really afford
Credit cards can be a fantastic way of spreading the cost of larger purchases, but it’s risky to use them for things you quite fancy but can’t currently afford. Unless you’ve got an interest-free card, you’ll quickly be charged interest and your bill will mount fast. This one may seem a bit killjoy – but it's an important rule to follow as it could stop you ending up with debts you’ll struggle to repay.
4. Bills and food shopping
While putting essentials on a credit card and paying your card off in full each month isn't problematic, if you need to pay bills for your essentials, like food, with a credit card, it can be a red flag for bigger money problems.
Head of personal finance at investment company AJ Bell, Laura Suter, says: “Putting these essentials on a credit card isn’t a good idea if you’re doing it routinely and don’t have a way to repay it. If you find that you can’t afford the essentials each month then seek help from a charity like Citizens Advice or StepChange, who should be able to offer support.”
“The risk if you put 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 and the support available if you are struggling to repay money you owe.
You should use your credit card for…
While there are some things you definitely shouldn’t use your credit card for, there are some cases where your credit card could be the best way to pay.
1. Items that cost £100 or more
You might be surprised to know that you get an added 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 great. If you spend £100 or more on something you’ll be covered by a protection called ‘section 75’, which means that the credit card company is equally liable if something goes wrong with the item you bought. If the items you buy don’t turn up, are faulty or aren’t what was promised, you can lodge a claim with your credit card company and get your money back.”
Better still, 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’re spending with an unfamiliar company
If you're buying from a retailer you've never used before, it can be useful 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 by, for example, online payment from your bank account. If the company you paid turns out to be fake or fraudulent, you can try and get a refund directly from the credit card company.”
However you shop, make sure you know your consumer rights in the event you need to get your money back.
3. To spread the cost of big expenses
If you can get a credit card that offers 0% on new purchases for an extended period, it can be a great way of spreading the cost of a big expense. Laura Suter from financial company AJ Bell says: “It’s well suited to big items them you buy once a year, such as a holiday, or if you’re hit with an unexpected cost and don’t have enough savings, like your washing machine or boiler breaking.”
She adds: “The golden rule here is that you have a plan to pay it back otherwise the debt can linger and interest charges might eventually rack up.”
A good idea is to make a note of when your interest-free period runs out. You also need to keep up minimum payments each month, so you’re not hit with penalty fees.
4. To get rewards or cash back
It’s not normally recommended that you put every day spending on your credit card, but there is one exception as personal finance analyst, Sarah Coles explains: “If you’re really disciplined with your credit card and you know you always have the cash to pay in full and one time, a reward credit card can help you build up rewards in return for everything you spend.” This could include cashback, airmiles or supermarket discounts.
The danger is that if you don’t pay your card back in full each month, interest charges will quickly undo the benefit of any reward.
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