Credit cards are a great convenience in our everyday lives, allowing us to easily buy products online and by telephone, and freeing us from having to carry large amounts of cash when making purchases in the bricks and mortar world. However, there's a potential dark side to plastic, with some unfortunate account holders getting out of their depth and building up debts that become a problem and cause of worry.
This is obviously a situation that's best avoided, and knowing when it's a bad idea to use your card can help you avoid getting into difficulty.
- Withdrawing cash at ATMs
Most cash machines these days will let you draw out cash using your credit card. This might seem an attractive option if you're short of cash towards the end of the month, but it's a bad idea for two reasons. Firstly, cash withdrawals will attract a fee of a small percentage of the amount you withdraw. This in itself makes it an expensive way of getting your hands on cash, but advances are also usually charged at a much higher rate of interest than purchases.
What's more, under a system known as 'allocation of payments', the repayments you make to your account are applied first to the parts of your debt which attract the lowest rate of interest. This means that so long as you are carrying some debt from purchases, your cash withdrawals will sit in the background, being charged a high rate of interest, and never getting any smaller.
- Credit card checks
These allow you to use your credit cards in situations where you normally can't, such as paying a bill by post. However, the interest rate charged on them can be as high or even higher than with cash withdrawals. This means you should avoid them for the same reasons, as given above.
- Covering the cost of everyday bills
Paying your energy bills, for example, using your card is convenient and easy, but is only a good idea if you repay the debt in your next payment. If you're using your card because you can't afford to pay the bill, this is a clear sign that you need to take a harder look at your personal budget.
- Expensive impulse purchases
Of course, we all like to treat ourselves from time to time, and no one would begrudge that. However, before handing over your card, bear in mind that the interest you'll pay over the months it takes to repay the debt will make your impulse buy much more expensive than it appears. Is it still worth it?
- To make repayments on other debt
Credit cards aren't usually the cheapest kind of borrowing available, so you should never use your card to service another, cheaper debt. The only exception to this is if you make use of a balance transfer facility, either to get a 0% rate for a limited number of months, or to lock in a permanently low rate.
As we can see, most of the above advice is simply common sense, but following these rules will give you the best chance of staying in control of your credit card, and avoiding running up unneccessary or excessive debts.
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