At the right time and in the right way, a credit card could help squeeze your business through a cash flow crisis or blip.
In fact, whisper it, credit cards are the main source of small business debt funding in the UK. But you can also quickly get sucked in to a greater degree of debt than you ever intended to. So if you have to use this tool, think it through thoroughly and proceed with caution.
The UK recently hit a record high when it came to credit card spending, suggesting that many people are not enjoying a large enough income to cover their spending habits.
If you’re wondering whether or not to apply for a credit card (or, indeed, where to get a credit card in the first place), then it helps to start with a review of what you would use it for. Different cards can be focused on different situations, such as building your credit record, making purchases, and earning rewards. Check out this guide to choosing the right credit card.
You also need to take into account your own style of money management. If you would find it difficult to resist the temptation of credit on demand or find it difficult to organise regular repayments, then a credit card may not be for you. Here are some of the pros and cons to weigh up before applying.
Pros:
More buying options: You can buy things over the phone, on the internet and in person. If you only have cash, you are limited to in-person purchases.
Credit boosts: Credit cards can help improve your credit score but this will only work if used properly and if you make your payments on time and keep your balance low.
Emergencies: Although it probably isn’t the best option to cover an emergency, a credit card can help with any unexpected expense.
Protection on purchases: If you buy a holiday or flights with a credit card and these are cancelled outside of your control you can obtain compensation more easily, as purchases are protected on credit cards.
No loss of funds if you’re caught up in fraud: If a fraudster gains access to your accounts and money, then they have the ability to drain what you have and you will need to wait for the bank to process the fraud report and then replace your money. When it comes to credit cards you will still have to wait for the card issuer to clear up the fraud but your main income is not affected.
You won’t need to carry large amounts of cash: Most places these days take credit cards, which means you don’t need to carry cash around with you. This is especially useful if you’re travelling abroad — the Post Office travel credit card, for instance, lets you spend abroad with no foreign exchange fees, so there’s no need to carry lots of foreign currency with you.
Rewards: You have the ability to win rewards when you own a credit card as some providers allow you to accumulate points to be used towards gift cards and miles. The more you use your card the more rewards you can earn.
Interest-free spending: Some credit cards offer a period of 0% interest, essentially letting you ‘borrow’ for free — if you pay your monthly payments. Ensure you have paid off all debt before this interest-free period ends, otherwise you might have to pay a higher rate of interest. Similarly, if you miss a payment or go above your credit limit, you may be placed on the standard rate of interest.
Reduce your debt: if you have existing, multiple debts, it might be worth getting a balance transfer credit card. This lets you consolidate your debt into a single credit card, often with reduced or no interest. As a result, you can pay off your consolidated debt quicker and all in one place.
Cons:
You could be tempted to spend more money: Credit cards give you a sense of power and the illusion that you have more money than you really do. With this surplus credit at your disposal, you may be tempted to spend it.
Credit score: Although credit cards can help with your credit score it can also ruin it. Your credit score is tied directly to how you use your credit card. If you are running up big balances and pay your credit card bills late, your score will be impacted.
Check out this guide on how to improve credit score if you are having problems with it and need help improving it.
Terms and conditions can be confusing: If you take the time to read your credit card agreement, you can be easily confused by all the jargon and phrasing. Understanding credit card terms is very important because you need to use it in a way that will not put you at risk of fees so have someone who knows about financial agreements to look over it for you.
Debt potential: You are at risk of debt when using a credit card. You create debt every time you use it. You can keep the debt from growing if you make sure you pay off your balance each month but, if you’re making purchases and only pay off the minimum amount your debt will continue to grow.
Limitations on usage: Depending on your credit card providers have restrictions on where and how you can use your card. You might incur a fee for using some credit cards in a foreign country, for instance. Not all have these restrictions though — the Post Office credit card has 74 million locations worldwide where you can use it.
Fees and penalties: if you fail to stay within your credit limit or miss a repayment, you may be required to pay a further fee. Barclaycard, for instance, charges for £12 for each late payment, and £12 if you exceed your credit limit.
While credit cards can have a negative effect, they can be a huge benefit if used wisely. So weigh up the pros and cons and think about your decision before jumping straight into getting one.