How to Take Out Credit Responsibly

Credit has a bad name. Mention it and we think of the credit crisis of 2007. Ask your parents or friends about taking out a credit card and they’re likely to gasp and question you. After all, taking out credit is irresponsible. Credit has become associated with living beyond your means, racking up huge debts that you can never repay and the first step towards bankruptcy. It’s true that taking out any form of credit may lead to the above, but the other side of credit – the positive one – receives very little of the limelight.

Using Credit to Help Your Personal Finance Goals

If you’re responsible with your money, there’s no reason you should avoid credit because others disapprove.Here are some reasons why credit can be a tool for positive action towards your personal finance goals:

1. Build your credit rating

Unsurprisingly, if you haven’t taken out credit before (e.g. credit cards, bank loans, mortgage, mobile contract), you will have a blank credit record or no history of credit behaviour and debt management. As you’ve never been in debt, there is little that lenders can rely on to understand how good a customer you will be (both in terms of the chances of you repaying on time and whether you will make them enough money to make your custom worthwhile).

2. Increase complexity in your accounting

Tracking your spending is one task, but keeping track of credit card balances and putting aside money each month to pay them off in full will add another layer of complexity to your accounting. If you’re not tracking your spending, I wouldn’t recommend a credit card yet (start tracking now using LLB’s free abacus). Until you know what your normal spending habits are, you are at risk of overspending.

3. Spend abroad cheaply

Unbeknownst to the best of us, exchanging money at the local bureau de change is not the best way to get the most bang for your buck when spending abroad. Sure, for short trips, convenience and those places where cash is still king, you may be better off with cash. Quite often, if not always, the way to get the best exchange rate is to use the most competitive credit card. Learn more and find the best cards on Money Saving Expert.

4. 0% interest rate

Become a credit card tart. Spend as you usually would on a credit card that has a 0% period (usually between 12 and 18 months) and set up your payments so that you only repay the minimum amount required. Meanwhile, set up a savings account earning a high rate of interest and drip feed the outstanding balance of your credit card. Once the 0% period ends, pay off the balance in full. using the savings and pocket the interest you earned. For full details and MM’s experiences, check out this article.

5. Earn cash back

Ideal for well-seasoned credit card users. Earning cash back is just one of the perks of using the most competitive credit cards for your habitual spending. Credit cards may offer around 5% cash back during the initial three-month period to help reel in customers. Once the bonus period is over and you’ve paid the balance off in full every month, you can bank the cash back and stop spending on that card.

6. Protect purchases over £100

If you buy anything that costs more than £100, pay for it using a credit card. If the company you’ve bought from goes bust, your credit card will protect you from losing the money.

Rules for Using a Credit Card

Using a credit card to enhance your personal finances isn’t a decision to be taken lightly. To ensure you don’t drown in debt, follow these rules strictly below.

Only use credit cards when you are stable financially i.e. not in any consumer debt already, struggling to make ends meet each month or unemployed or without a regular income. Credit is a tool to enhance your spending, not an excuse to overspend and live extravagantly.
Always pay off the balance each month in full to avoid paying any interest*. Some mistakenly think that you automatically have to pay interest when using a credit card, but this is false. To make sure you pay off the balance in full, set up a direct debit from your current account so that you never forget.
Don’t change your spending habits or increase your expenditure because of the credit card. Use the card to replace your current method for paying for regular expenses such as bills, groceries and essential items. You will still need to pay the credit card bill every month in full.

*except for when you are using a 0% credit card where you just pay the minimum repayment until the end of your 0% period when you pay off the entire balance