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. If you fail to make even the minimum repayment on the card, interest charges can add up very fast.

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

Things to watch out for

  • High interest rates (often over 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 £12 for missed / late minimum payments. And if your payment bounces, you could pay £12 to the card company plus £10-20 in bank charges.
  • Missed payments or excessive borrowing can also affect your credit score
  • Never withdraw cash by credit card. Interest rates on cash withdrawals are likely to be higher APR and run from the day of withdrawal – there is rarely an interest-free period.
  • 0% deals rocket to ‘normal’ high interest rates after the initial deal expires. Additionally if you miss a payment you may lose any introductory deal.
  • 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 installment 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 installments 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.

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