12 Your first credit card

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This is an image of a credit card.

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When you reach 18 you should aim to get a credit card. After a bank account and a savings account, a credit card is the third cornerstone to personal financial management.

Until you reach the age of 18 no provider will give you a credit card – in the same way that bank overdraft facilities are not available to those under 18. This is because until you are 18 you are not normally legally responsible for your debts.

It may make sense to apply for a credit card from the existing supplier of your bank account, because they will have evidence (hopefully!) of your experience in managing your bank account properly. This will help in their assessment of whether or not you should now be given a credit card.

A credit card allows you to pay for goods and services over a period of time. Instead of the cost of items being taken directly from your bank account, you receive a monthly bill – typically online – telling you the outstanding balance on the account and the minimum amount that you need to pay off this month (for example the greater of 1% of the balance or £25). It makes good financial sense, though, to pay off each monthly bill in full to avoid paying the high rates of interest that you would otherwise be charged.

So a credit card enables you to buy goods that you might not be able to afford in total over the period of a single month but that you can afford if the sum can be spread over a number of months.

All cards have a maximum balance limit that you cannot exceed. This limit will be communicated to you, and at the age of 18 you can expect the limit to be small – maybe just a few hundred pounds.

One reason for using a credit card is that it can help to build up a positive record of how you manage your money. If you use the card sensibly this positive record will help with your credit score – a subject you’ll explore later in this course. Mismanaging your credit card account – for example by missing monthly repayments or even just being late with them – can damage your credit score, as well as racking up interest charges and penalty fees.

So take great care in managing your credit card account. The UK credit reference agencies will be watching you.

Now watch this video where moneysaving expert Martin Lewis talks to students at Denbigh School in Milton Keynes about the pros and cons of credit cards.

Download this video clip.Video player: mmmft_1_video_week1_lewis_creditcardsmp4.mp4

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Transcript

MARTIN LEWIS

Daisy.

DAISY

Given that so many young people get into trouble with credit card debt, does it make sense to get a credit card?

MARTIN LEWIS

Yes and no. Credit cards are like fire. Used right, they're a very useful tool. Used wrong, they burn.

So one of the great important things you need to do in finance is know yourself. It's really important. Predict your own future behaviour based on your own past behaviour. Do you have impulse control? Or are you savvy? Are you sensible? Or do you like to go out and spend money?

If you like to go out and spend money, and you like to have things, and you don't have much impulse control, do not touch a credit card with a barge pole. It's a bad thing to use because it's an open ended. You have a credit limit of 2,000 pounds. You can go and spend it. You can splurge. You can do it on impulse. It's a bad thing to use.

On the other hand, I have very good impulse control. I'm the money saving expert. It's what I built my career around. You would expect me to do so. And I spend everything on a credit called that I possibly can. And there are two reasons I do that, and one more reason that applies to you and doesn't apply for me.

So here's why credit cards are good. Number one, my credit card gives me cash back or reward points when I spend on it and the debit card doesn't, so it pays me to spend on it. I pay the card off, and this is my catchphrase. I do it in this way on television. If any of you've heard me, you'll know what I'm about to say, and I always do it loud, and this is how it works. I pay my card off in full at the end of every month. And that means I don't pay any interest on it. So it has no cost to me, so effectively my credit card is now like a debit card.

Number two, there's a law, a peculiar law in the UK, which is called Section 75 of the Consumer Credit Act 1979. What that says is if you pay for something on a credit card that cost between 100 pounds and 30,000 pounds, the credit card company is jointly liable with the retailer for the entire amount. And that applies even if you only pay one penny on the credit card.

I shall tell you a story, a true story, because they're always the best type. A lady bought a kitchen for her home that cost 12,000 odd pounds. She paid a 100 deposit on a credit card. She could have just paid the penny, but she paid 100 pound deposit on the credit card.

The kitchen company went bust before it delivered the kitchen. Twelve thousand pounds. She came to my site. She read the template letter, and it said you're entitled to the money from the credit card company. But she'd only put 100 pound deposit, but you're entitled to the money from the credit card company, the entire amount.

She went to the credit card company. And the credit card company she wrote to them and said, apparently in the Section 75 of the Consumer Credit Act you're jointly liable. I haven't had my kitchen. I've got debt on your card. I'd like you to give me the money please. And the credit card company said, no.

So she went on. She went on to the financial ombudsman, which is free. An ombudsman is like a quasi judicial thing. It's a bit like a court, but you don't have to pay for it. It's easier, and it's free, and they can make a decision based on fairness, not just on the law.

She went to the ombudsman. She told them what happened. The ombudsman said, not only does the credit card company have to pay you the 12,000 pounds back, but because it's caused you so much hassle and they treated you wrongly, you're getting an extra 1,000 pounds on top. Paid a 100 quid on the credit card, credit card company had to give the 13,000 pounds back.

Very valuable. Extra consumer protection. Works anywhere in the world that you're spending money. Credit card, another really useful thing. Every time I buy a big purchase on the credit card, every time I buy a big purchase, I put it on the credit card. I get that extra consumer protection. There are some issues where it doesn't work, but we won't go into that now.

End transcript

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