Borrowing or using credit to pay for stuff is usually frowned upon.
Two of the foundations of good personal finance management are to avoid getting into debt in the first place or prioritise repaying debts if you do have them.
But if you have good spending behaviour and habits, there are times when using credit can be beneficial for your money management.
Paying on Credit Cards
Using a credit card is often thought of as spending outside our means. In other words, you don’t have enough income to buy something, so you pay for it on a credit card instead.
But sometimes, even when you actually have money to pay for something, using a credit card to pay for it can be a better option.
Times when paying on a credit card can be better than debit card or cash
1) Buying expensive things
There’s a consumer protection piece of legislation called ‘Section 75’.
This law basically means the credit card provider is also responsible, together with the retailer, for giving you your money back if anything goes wrong with your purchase.
This protection is available on purchases between £100 and £30,000, but you don’t need to pay for the whole amount on your credit card. You could pay just 1p on a credit card, and you’d still get protection on the entire value of the purchase.
Example:
You go to a furniture store and buy a sofa for £1,000
You pay 1p on a credit card, and the rest on your debit card.
If something happened to the sofa – e.g. it was faulty, or the retailer went out of business and the sofa was never delivered – you’d have Section 75 protection on the whole purchase, meaning the credit card provider would be responsible for refunding you, if the retailer couldn't/wouldn't.
Just remember – pay off the credit card purchase in full before it starts accruing interest.
How long do I have to pay off my credit card before interest is charged?
You usually have up to 56 days to pay off a purchase made on a credit card. After that, interest will be charged on a daily basis. Check with your credit card provider for the exact interest-free period.
2) Making the most of 0% interest rates
Many credit cards now offer introductory rates of 0% interest. Depending on your credit score, you could get this interest rate for over 2 years.
Now I’m not encouraging you to spend on a card just because it has zero interest. But sometimes having a card like this as a backup can help you if you’re having an unexpected expensive month. Yes, we should all have emergency funds in place. But life happens. If you’re a disciplined spender and have over 2 years to pay back a credit card purchase, this type of credit card can be a useful tool.
And if you’re using a different credit card that’s building up interest that you’re struggling to repay, transferring this debt to a 0% interest credit card can be a good step to repaying debt, as it prevents interest from building up further.
3) The best exchange rates when spending abroad
There are so many ways to spend money abroad, it can get confusing and expensive!
Many of us pop to the bureau de change and take cash abroad with us.
While there’s nothing wrong with that, you won’t get the best interest rates. The most value-for-money exchange rate you can get is one that’s linked to the exchange rate banks use. And that’s when paying by card can be best.
Usually, your credit card will either exchange at the Mastercard, Visa or American Express wholesale rate, which are practically perfect i.e. can’t be beaten.
There are two add-on fees you need to look at on top of this, however:
- Non-sterling transaction fee – this is an extra fee as a % of the value of the purchase and can be as much as 3%
- Non-sterling cash withdrawal fee - this is an extra fee as a % of the amount of the cash withdrawal and can be as much as 3%
So, to get the best foreign exchange rate, you’d need a credit card that does not charge these fees.
Also make sure you pay in the local currency, as paying in pound sterling abroad will incur extra fees
There are currently 3 credit cards on the market with no fees:
Again, remember to pay off any purchase in full before interest starts getting charged. And if withdrawing cash, pay off the same day (assuming you have internet access on your phone) as cash withdrawals start charging interest immediately.
4) Rewards for spending on a credit card
Known as Reward Credit Cards, many credit cards offer cashback, bonuses or reward points at certain retailers when you spend on their credit card.
There are many on the market so take a look at the list here.
Remember – this type of credit card typically works better for you the more you spend. So it requires you to be more strict with paying off in full each month.
Buy Now Pay Later schemes
Buy Now Pay Later has had a really bad reputation for encouraging people to pay for things they can’t afford and just delay payment.
But, if you’re a disciplined spender, then using something like this can make paying for online purchases much simpler.
I like to call it ‘Try Now, Pay Later’. This is particularly useful for clothing.
With companies such as Klarna, you have an option to pay in 30 days’ time. It doesn’t leave a mark on your credit score provided you pay on time, it’s simply an IOU to the company.
So, let’s say you order some clothing online. If you pay for it upfront that money leaves your account. Then you try it on, don’t like it and return it and wait for your refund. Do this with multiple purchases and it can be confusing having money going in and out of your account.
With a pay later option, anything you return just gets deducted from the IOU. So, if you return everything you’ve bought, no money ever needs to leave your account.
The main rule with this is to return the purchase asap so that it’s processed within 30 days. This usually isn’t a problem as most returns are processed within 14 days of receipt at the warehouse.
I tried this a few months’ ago and it’s now the only way I pay for online clothing.
Personal Loans
While the interest rate on a personal loan can be higher than credit cards, you’ll typically be able to borrow more money than on a credit card. So a personal loan can be useful for high-value purchases.
For instance, you might struggle to get £7500 on a credit card. A personal loan for £7500 could come with as little as 4% interest.
Affordability checks are pretty tight on personal loans, so there is no guarantee you’d be offered a particular loan at the application stage.
What a personal loan gives you is a fixed repayment plan that clearly spells out what you owe and when. For disciplined spenders with a steady income stream who need a cash lump sum, repaying an affordable personal loan should be fairly straightforward.
Let’s say you need £7500 to pay for house renovations.
You take out the loan over 3 years. Including annual interest of 4%, the total amount to repay is £7962.89. This is repaid in monthly instalments of £221.19.
That £221.19 won’t change as long as you keep making payments on time. So it becomes part of your monthly budget plan.
Summary
If you already have a solid foundation of good spending behaviour, paying for things with credit may help you manage your finances better.
Remember – credit can be a useful tool if used correctly. Make sure you know the rules of the particular credit you’re using before spending away.
