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Are you a baby when it comes to credit? Has it been 100% debit cards up til now? Is this because you’re a very intelligent, responsible infant who wants to avoid getting into debt? Well, get ready for a dose of big sisterly advice, except I’m not your sister or a financial adviser, just someone who’s been there and done that when it comes to credit cards.
I recently took part in a panel about money for recent graduates, and it really got me thinking. Many of the people who asked questions during the panel and those I talked to after the event had a strong aversion to credit cards, but were keen to work towards getting a mortgage.
Both of these involve you borrowing money, but one has a seriously bad rap.
It’s one of those illogical unwritten life rules that you have to have credit to get credit. Just like the time a TV channel cancelled my unpaid internship because I didn’t have enough experience, it’s very frustrating. Unfortunately, if your credit score is in the toilet, it might not be your fault, but you probably aren’t going to be looked on favourably by mortgage providers.
There are good ways and bad ways to use credit for the first time. I’ve ranted on Twitter about new credit options like Klarna before. I think people have a very poor understanding of what buy now pay later options like Clearpay, Laybuy and Klarna actually are, and what happens when you don’t pay it back on time. I want to write about this in more detail, and do lots of research on it. But before then, there is an alternative to signing up to these companies that don’t make their interest rates clear, and yes, they do have an interest rate, it’s not the 0% they advertise!
And that’s what I’m here to discuss. I’m not a financial adviser btw – let’s make that clear from the get-go.
Why it’s worth getting a credit card
Your credit score
Never checked your credit score? I get it, it’s terrifying that without your permission your whole financial history is on three databases that any company can look at. You can pay to look at your credit score, but it’s totally free on the following sites:
- Clearscore – which shows you your Equifax score.
- Credit Karma – which shows you your TransUnion UK score.
- MSE Credit Club – which shows you your Experian score.
Don’t worry too much if it looks bad. If you’ve never had any big money problems (CCJs, bankruptcy, defaulted payments etc) it’s not too difficult to build up your score. Never having used credit can leave you with a score as low as someone with problem debt, but it’s much easier for someone like you to improve it. Check the actual “Credit Report” section of these sites, not just the score, because if there’s something on there that isn’t correct, you need to let them know.
Want to join a community of other people trying to buy their first home? Join my free Facebook group First Time Buyer Wannabes.
It’s a cheaper way of accessing credit
Overdrafts. Banks want us to use them, they earn them money!
A common feature of student bank accounts is a juicy fee-free overdraft. It gets us used to reaching for our debit cards, even when the balance is £0. However, once overdrafts stop being fee-free, they become very confusing and sometimes extremely expensive. According to a 2019 article from The Guardian:
“Let’s take a standard current account-holder who borrows £500 on an authorised overdraft over seven days. At NatWest they will be charged £7.75 (£6 monthly fee and £1.75 interest), while if they are at app-based Monzo it’s £3.50 (50p a day), and at Barclays it’s £5.25 (75p a day up to £1,000).”
This is only one week of borrowing £500 in an arranged overdraft. Unarranged overdrafts are considerably more expensive, and the longer that money isn’t there, the more the fees will multiply. If you did the same on a credit card, even one with a high APR, you’d have until your monthly bill is issued to pay it back, before you’d be charged any interest.
You’re protected from dodgy shops and companies ripping you off or going into administration
If you’re spending more than £100 on something – you should use a credit card to buy it. Section 75 protection is no joke, I promise.
STORY TIME: how my credit card once saved me from losing out on £500. I bought a phone from a professional-looking website, it was on cashback sites, had ok reviews, seemed legit… However, after a week my phone still hadn’t been dispatched, so I checked more recent reviews and I wasn’t the only one this had happened to. It turned out the company had gone into administration. Bad news all round. But I checked the Barclays site and submitted my Section 75 request, the form isn’t very long, and I got my money back in only a couple of days. It was really painless, and if I’d paid another way, I wouldn’t have been able to sort it so quickly. It applies to all credit card purchases from £100 to £30,000. It’s sort of the best thing ever.
What to watch out for
Credit limits
As hard as it is to get credit, once you have it, it’s a credit card company’s ultimate goal to try and get you to use a lot of it. When I got my first credit card at 22 my limit was £500, five years down the line I have £22,000 at my disposal.
It’s possible for you to ask for your credit limit to be increased or decreased. When asking for an increase, know that being turned down for one could leave a mark on your credit file. But why would you ever ask for your credit limit to be lowered? Because your credit card company will raise your card’s limit without you asking.
Having a high credit limit is useful, mine is high enough that I can use my card to pay for my £5,000 season ticket before getting reimbursed by my employer. It also means my credit utilisation is very low.
However, having over £20k that doesn’t belong to me in my pocket is really dangerous. If you know you’d be tempted to spend that sort of cash, or you have mental health issues around binge spending, then don’t be afraid to ask for your credit limit to be lowered.
Credit utilisation
This is something credit reference agencies look at when calculating your score. If you have a £1,000 limit, and you spend £999 of it each month, it doesn’t look particularly good. You want to keep your utilisation low, at under 25% of your total credit limit. It’s a fine balance, because you do still need to use your card regularly to reap the credit score rewards. Something I did with my first card was to only use it for the bus and the tube. I know I spent around £120 a month on TfL, so it worked well with my credit limit at the time.
Please use your credit card, if you have one. Weirdly, it’s possible to use “too little” credit, which can impact your credit score. If you get a refund, try to avoid keeping it in your account, if you make sure you don’t have a positive balance before your next bill is issued, your credit score should remain unharmed.
Paying it back
There’s a reason credit cards don’t have a great reputation. They make it really easy to spend money you don’t have. The way you pay back credit card debt is setting you up to fail too. When you take out a new card, they don’t encourage you to set up a direct debit to pay off the full balance each month, which is what you SHOULD do. They want you to forget to pay it back and be whacked with late fees and interest. It’s how credit card companies make their money! Your minimum payment each month will be low, a minimum of 1% of your balance, which sounds great, but it means you’re going to have that debt for AGES, and pay a fortune in interest. The maths is quite terrifying – check out MSE’s repayment calculator for real stats.
As soon as you get your card, set up a direct debit to pay off the full amount each month. That way, no matter what your APR is, you should never pay interest. If you have a 0% card, and you’re using it responsibly to pay something off, set up a regular amount to pay every month that will clear the balance before the 0% period ends.
Beware of cash machines
Did you know you can withdraw money from your credit card at an ATM? Although, just because you can, it doesn’t mean you should. Even if you have a 0% card for spending, taking cash out doesn’t count as spending. I took money out on my credit card once, and was charged about £3 for the pleasure of taking out a tenner. Your card company will charge you interest by the day on cash withdrawals until you pay it back.
It’s seriously not worth it, trust me.
Rewards aren’t that rewarding
When you sign up for a credit card, you want the best one, right? The one that’s going to get you free long haul flights and so many rewards it’s almost like you’re being paid to spend money!?! Yeah, right.
As a credit card newbie, you won’t yet qualify for the most rewarding cards out there. And as someone who has the most rewarding cards out there, it’s a paltry sum.
At the moment I have two rewards credit cards. An American Express card that gives me 1% back as cashback, and one M&S Mastercard, which pays me 2% on what I spend in Marks and Sparks, and approximately 0.2% on what I spend elsewhere (in M&S vouchers).
Airmiles, cashback, Clubcard points, whatever your “reward” might be, they’re uniformly disappointing. EU rules meant back in 2016 many credit card companies made their rewards much less rewarding. As a general rule, the introductory offers tend to be quite good, but after that, you may as well not bother.
I will say for Amex, the deals they have are actually pretty good. In December you can get £5 back on a £10 spend at small retailers with their Shop Small promotion. And often they run deals like 10% back on whatever you spend at Morrisons, or others that you can stack with voucher codes, and can bag you a bargain. But, not everywhere takes American Express, and you have to apply these offers to your account before you spend the money. Watch out for American Express cards that charge you a yearly fee after the first year, because it isn’t cheap, either!
As a whole, though. Credit card rewards are really really pants.
Applying for credit
Want to hear something stupid but true? You shouldn’t apply for any card unless you’re sure you’re going to get it. How is that even possible, right? Are you supposed to be psychic with Mr HSBC or something? If you apply for a credit card and they turn you down, it looks bad on your credit score. And the more you apply and get rejected the worse it is. But how do you know until you apply? This is why I’d never tell someone who’s never had a credit card to go and apply for one directly.
So, how should you apply for a card? Do you get a choice? As a newbie, try to ignore exciting, well-advertised cards with cool features. You can get them a year down the line, just focus on being accepted first. There are a few options:
- Capital One has something called QuickCheck that will tell you if you can have the card before you actually apply. It won’t show up on your credit report, which is quite clever. This is a good option if you want a sure thing.
- If you value choice though, I’d try out MSE’s Credit Card Eligibility checker. You pop in all your details and it’ll come up with some options for you. It gives you a % chance of being accepted for several cards. You’ll get the best percentages if you say you’re looking for a “bad credit credit card” (which isn’t as bad as it sounds).
My first card was a bad credit credit card. I didn’t have actually bad credit, I had no debts except my student loans, a job, no missed payments, I just hadn’t built any credit. If you have your heart set on earning rewards, there are BCCCs with rewards attached, my first one was a Tesco Clubcard one!
Well, I hope that helped… I know this is a mega long read, but I really feel nobody introduces people to credit cards in the right way. There aren’t any links in here that’ll make me money, I’m not trying to push them, but I also don’t think they’re a form of credit that should be avoided at all costs. An overdraft is worse, a catalogue account is much worse, a guarantor loan is infinitesimally worse.
2,000 words on credit cards. JEESH! I’m sorry about all the creepy doll pictures. Stock images of people using credit cards are so dull.
Hi Bronni,
Nice piece about credit scores!
The other thing you need to be very aware of with credit cards is how they apply the payments you make. I had an incident a few years ago that highlited this really well.
I have always paid off my credit card(s) each month by direct debit as I really don’t like paying interest. On the day in question I had an urgent need for cash and only had a credit card with me. I went to a cash machine and drew out £140 – knowing that interest would accrue from that moment on.
When my statement arrived it was, as ever, paid off in full before the due date including the interest on the cash withdrawal. I therefore thought that would end the interest accrual. However, when the next month statement arrived that too had interest on it – exactly 50p. I assumed that this must be the interest that accrued between the statement date and the payment date and so paid it as usual.
When my next statement arrived there was yet another 50p of interest so I called the credit card company to find out what was going on. They basically explained that payments are applied to the lowest interest bearing charges first and also to the most recent trasactions first. Because I had used the card between the statement date and the payment date it was these transactions that are cleared leaving a small amount of the cash withdrawal outstanding. Because the amount was so small their minimum interest charge was 50p.
The only way to clear this was to make sure at some point the card balance is zero. Had I kept using the card between the statement and payment dates I can only assume that I’d still be paying interest on that cash withdrawal from 13 years ago – about £78 by now!
Simon (@GitMoany on Twitter)