Using a Credit card - Pros and Cons

How The Minimum Monthly Payment Could Cause Financial Difficulties

Mar 25, 2009 Asa Ghaffar

Does making the minimum monthly payment on credit card debt help or cause financial difficulties? Should a high APR credit card be used to pay household bills?

According to statistics produced in April 2009 by Credit Action, the total credit card debt in January 2009 was £53.0bn. The UK collective credit limit on credit cards is £158 billion, which means that the average credit card limit in the UK is £5,129 per person. Whilst credit cards can help consumers cover vital household bills, many struggle with high levels of personal debt.

The Benefits of Using a Credit Card

Manage household bills. It is possible to avoid financial difficulties by managing their finances with their credit card. Consumers have avoided missing mortgage payments by taking a credit card cash advance or paid their weekly grocery bill when family finances are tight.
Credit card rewards. Whilst choosing to pay in cash helps consumers avoid credit card debt, it doesn't earn them credit card rewards. It is possible to earn air miles, cash back and store rewards. Provided that more than the minimum monthly payment is made, it is possible to make extra cash by using a credit card.
Interest-free credit. Those using a credit card will benefit from a period of interest-free credit for approximately 56 days.
Balance transfers. Consumers with a good credit rating can avoid credit card debt by performing a balance transfer. It is possible to benefit from interest-free credit for up to 15 months before performing a further transfer to another new credit card.
Additional card holders. Should a family member not be able to hold a credit card because of bad credit, it is possible to add them as an additional credit card holder.
Convenience. Using a credit card is vastly more convenient than choosing to pay in cash;
International travel. Many hotels won't accept a traveller that isn't able to provide a credit card to cover additional expenses or damage.
Credit card refund. S75 of the Consumer Protection Act 1974 entitles a consumer to a refund on a credit card purchase of between £100 and £30,000 should the item not be received.

The Negatives of Using a Credit Card

Credit card debt. Having access to credit can be a temptation for many consumers, particularly during sales. This can lead to high APR credit card debt, especially for those that opt to make only the minimum monthly payment each month. Clients of CCCS owe on average over £14,000 on credit cards. CCCS counsellors are now dealing with almost 50,000 credit card related debts every month, 3.5 times more than three years ago.
High APR. The average interest rate on credit card debt is 17.91%. uSwitch.com estimates that the average APR for a cash advances is 29.97%.
Charges. Late payments can result in a £12 penalty being added to any outstanding credit card debt. There can also be annual, administrative and further cash advance charges imposed on credit card holders.
Currency conversion charges. The majority of credit card providers charge customers additional fees for using their card overseas. According to Motley Fool, these charges typically amount to about 2.75%. Credit card cash advances are even more expensive.

A credit card can help sensible consumers budget effectively, manage household bills and earn credit card rewards. However, many consumers struggle to control their spending and are tempted to make only the minimum monthly payment each month. This can lead to high APR personal debt and the need for a debt solution, such as an Individual Voluntary Arrangement or debt management plan.

Those struggling with financial difficulties and personal debt may be interested in finding out whether they have an illegal credit card or unenforceable loan agreement. Individuals that are struggling with serious debt problems may be able to write-off debt with a debt solution, such as an Individual Voluntary Arrangement.

The copyright of the article Using a Credit card - Pros and Cons in Personal Budgeting/Finance is owned by Asa Ghaffar. Permission to republish Using a Credit card - Pros and Cons in print or online must be granted by the author in writing.