How to use credit cards

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credit card blocksFew of us have survived having a family without being stung by bank charges at some point.

But there are ways to use credit cards without paying for it.


Credit cards explained

It’s worth remembering that banks exist to make money. Not to look after your money or help you. The trick is to use their services without paying for it!

Bear in mind that buying something with a credit card is a loan. The money is only yours once you’ve paid it back. But if you’re on top of your spending you can take this in your stride, while making the most of buying on credit.

 

Interest rates

Essentially, interest rate is how much you get charged for borrowing money.

We’re used to paying for products or services, whether it’s the plumber for fixing that leaky pipe or the supermarket for party bag fillers. The interest rate is simply the cost of borrowing.

When you work out the amount you’ll pay when borrowing money, consider how long it’ll be before you can pay it all back. Because you’re usually not just charged interest on the amount you borrow: you’re also charged interest on the interest. This is called ‘Compound Interest’.

Confused? It is confusing! Worry not; here’s an example to help explain:

  • Borrow £1,000 at a rate of 30% over one year, and you’ll have to pay back the original £1,000 plus £300 in interest, i.e. £1300 in total.
  • But if you can’t pay this back for another year again, you’ll be charged 30% of £1300 this time – which is a further interest of £390.
  • So after two years, you now owe £1,000 + £300 interest + £390 interest = £1690.
  • By year three, you’ll owe more than double the amount you first borrowed. And this is annual interest: many interest rates are monthly.

But don’t despair! A savvy and organised approach will spare you these extra charges.

 

How can I avoid credit card charges?

Put simply, pay in full the amount on the bill every month before the due date. Do this and you won’t get charged!

Don’t panic if you think there’s too much mayhem coordinating all the after-school clubs to do this too! Instead set up a monthly Direct Debit from the account your salary gets paid into. Choose a date that’s a few days after pay day so there’s always enough in the account to cover the bill.

If you’re buying things on your card each month that vary a lot in price this’ll be tricky. So use your credit card only for essential things, like food and petrol. This way it’ll always be within a certain amount. Use cash for those cheeky treats instead!

Using your card for one-off but costly things, like holidays and car insurance? Don’t pay for them up front with a credit card because you’ll pay back more in interest over the months. Instead, save up for your holiday in advance. You can still pay with a credit card, but you’ll already have the money saved to pay the whole bill when it arrives the following month. Now doesn’t that sound like a holiday in itself?!

Finally, always check your bills and bank statements: they sometimes make mistakes that can cost!

 

What about cards that give rewards?

Certain cards simply pay you to spend on them. How much? Well, if you’re careful you can earn hundreds for free.

Find out more in our guide on how your credit card can make you money.