The fundamental idea of the credit card is sound, as long as one applies basic common sense and keeps to spending limits. A credit card can be useful if you know that you have an important purchase to make and you know that you have some money arriving imminently. Then you use the credit card and when your money arrives, you pay the balance off in full. This means that you get your product early and your credit rating improves slightly since you have used and then paid off the credit card.
If you know a stream of money is definite then one can use the card to spread payments; this is not as ideal as the scenario above but can still be useful for larger payments and for increasing a credit rating. The essential point is to pay above the minimum payment required. This will cut down on payback time and, more importantly, interest. With just a minimum payment, your purchase could double, triple or more in value and you end up buying the same goods repeatedly!
As a very basic example, if your credit card balance is £1000 and you decide to pay just the minimum, it could take you eight years to clear the outstanding balance! This is assuming a minimum payment of five pounds and a monthly interest of about 1.14%. If you increase the minimum just a little, you can shave off a year or two and increasing it further can reduce the time to clear the debt dramatically. Off course, the longer you pay the more you pay which is why the first step of using the card according to exactly how much money you are expecting is the best idea.
There is also no reason why you need to stick with the same card. If you interest rate has gone up then change credit card companies, if you have an outstanding balance then balance transfer to a card that offer zero percent as an incentive. Even without a balance, you can switch at anytime to take advantage of a new credit card offer of zero percent on purchases for a fixed time. No one says you have to stick to the same credit card; use the card while it is advantageous and the switch to another.
Credit cards can be useful as long as you stick to basic guidelines:
- If possible, pay the balance in full when your statement arrives. This clears the debt and improves credit rating
- If not possible then pay off at least triple the minimum payment
- If number 2 is not possible then I would suggest not using a credit card!
- When your offer of zero prevent on purchases is over, switch to a new card offering a similar bonus
- If you have a balance then get a new card with a zero percent and transfer the balance. Do watch out for the charge on the balance transfer; make sure it is reasonable and worth the point of transferring!
- Keep away from cards that charge a monthly fee just to have a credit card.
- Read the credit card fine print.
Here is a good resource for debt if in the UK: http://www.nationaldebtline.co.uk/
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