Credit Cards: Impartial Advice on Choice/Use
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Credit Cards

Credit Cards are very expensive when borrowing money

Impartial Advice
to Help You Choose and Use

In general, credit cards (sometimes referred to as "plastic") are a very poor way to borrow money. There are some exceptions - such as the 0% APR Credit Card trick - , but the main problem with borrowing money using credit cards is that it is very, very expensive, due to a high APR.

However, credit cards are used by very many people, including those who are financially astute. So does the popularity of plastic mean that the world has gone mad?

There are some very significant benefits of using credit cards, such as convenience, consumer protection and additional benefits such as air miles or reward schemes.

Credit, Debit and Charge Cards

To understand credit cards, it is important to recognise the distinctions between credit, debit and charge cards.

Credit cards are, in effect, unsecured loans. Every purchase increases the size of your unsecured loan.

Debit cards are, in effect, electronic cheques. At the time of purchase money is transferred out of your bank current account.

Charge cards are a sort of combination of the two. You have a short term unsecured loan, but it must be paid off, in full, at the end of the month. Every purchase increases the size of your loan, but at the end of the month money is transferred out of your bank account to completely pay off that loan.

There are differing legal implications of using each of these. The advantage of using credit cards is that, under UK law, they provide additional consumer protection above other forms of purchase. The lenders are jointly liable with the supplier for purchases that fall within minimum and maximum limits (between £100 and £30,000, in 2005). This makes it easier to get your money back if something goes wrong, and provides additional incentive for the supplier to redress any valid complaints you have.

In view of this, and bearing in mind the expense of borrowing on plastic, the best choice is often to have credit cards but to use them as if they were charge cards. That is, use plastic for regular purchases, but pay off the balance in full at the end of every month. If you need to borrow money over a longer period of time, you should use loans or other forms of finance. Even if you only need to borrow money for a month, it is often better to arrange an overdraft with your bank, or arrange for a temporary increase in your overdraft limit.

Main Differences

When choosing the plastic to go in your wallet, the main differences are:

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