Credit cards can be a quick route to unmanageable debt. They can be useful at times, but it is important to understand the system to avoid and potential problems.

Apart from a few cards that charge an annual fee, most are actually interest-free if you pay off the balance in full each month. However, for students on lower incomes, it’s all too easy to spend without thinking about paying it back. And if you fail to make even the minimum repayment on the card, those interest charges will really sting.

However, if you decide you really do need a credit card, here are a few pointers:

Things to watch out for

  • High interest rates (10-20% APR) make credit cards an expensive way to borrow money.
  • Unlike student loans and overdrafts which are repaid after you graduate, credit card bills arrive monthly.
  • Credit card companies charge around £25 for missed / late minimum payments. And if your payment bounces, you could pay £25 to the card company plus £30 in bank charges.
  • Never withdraw cash by credit card. If you get sent credit card cheques shred them. Interest rates on these and cash withdrawals are exorbitant: 20-30% APR from the day of withdrawal – there is never an interest-free period.
  • Beware of payment protection insurance. It will significantly increase your monthly repayment and as a student you are unlikely to benefit from its ‘protection’.
  • 0% deals rocket to ‘normal’ high interest rates after the initial deal expires.
  • Many students miss out on the best interest rates because of a lack of credit history or a poor credit rating.

Helpful hints

A credit card can help in a cash flow crisis (e.g. when you’re waiting for a student loan instalment or wages). But pay it off in full as soon as your awaited money arrives.

Spread the costs of expensive purchases (e.g. textbooks) on a card that offers 0% interest on purchases for the first 6 months. Split what you owe into 6 instalments and pay off 1/6 each month. Don’t make minimum repayments only, or you won’t clear the debt before interest kicks in. Note the date when the 0% rate expires in your diary, pay off the debt before then and cancel the card.

If you have frequent cash flow crises and you’re spending more than you can afford, have a look at our budgeting tips.

Related articles

External links