Credit Cards

What is a Credit Card?

A credit card is a card which can be used to make payments issued by financial institutions (banks for example), from which you can borrow money from a pre-set limit. This limit is based off yourcredit score and your financial history.
The credit limit (the maximum amount of money which can be borrowed each month) typically starts from £1000 - £1200 for those with lower scores and incomes. This limit can be increased by applying for more credit cards or applying for more credit with the same card. This value then increases depending on how reliable of a lender you are and if you can afford to borrow more.

Credit Cards and Lending Responsibly.

Credit cards are excellent tools to improve your credit score and to learn how to lend responsibly. However, if not used responsibly, they can result in high debts with high interest rates, resulting in a dangerous cycle.
Very often, the interest rates on credit cards can be extremely high - particularly when you have a low credit score, sometimes higher than 60%, which means that even small amounts of debt can multiply. You would need to pay back far more than what you originally borrowed.
In addition, lenders typically allow you to pay back a minimum amount each month. This means you are not paying back what you have lent in full each month. Therefore, you end up paying more than is necessary back to the credit agency.
Take this example:

You have lent £1000
The credit card APR is 60%
You pay back £50 a month.
This will take you 3 years and 6 months to pay off, with a cost of debt (the additional amount paid back) being £1047.47.

Now, lets increase the amount paid back each month to £100:

This will take you 1 year and 1 month to pay off, with cost of debt of £301.85.

In contrast to this, if we only pay back £40 a month, we see the true effect of the compounding debt:

This will take you 14 years to pay back, with a cost of debt of £5,713.01,

This increase is astronomical and is an absurd amount of money to pay back and an incredibly long time to be in debt with such a high interest rate. However, of course, there is the option to pay off the debt in full each month. This means you do not need to pay extra back - there is no cost of debt. This is the best option by far.
Here are some credit card repayment calculators linked below for you to see for yourself how different repayments and interest rates change the amount needed for repayment.

How a credit card is used is also a huge factor in your credit report. Depending on their use, this can range from huge benefits to huge drawbacks. Some vital things to remember are:

Ensure you never miss a repayment. Even just one missed payment can be a huge hit to your credit score.
Show you can effectively manage your spending: To show that you are a reliable spender, do not spend more than 30% of your available credit on any of your cards. And if you want to improve your credit score further, it is commonly advised to keep spending less than ten percent of your available credit.
Do not apply for too many credit cards in a short period (6 months or less), as too many applications for credit and hard searches on your report can be seen as a red flag to lenders.

What does this show us?

There are three main things that this shows us:

First of all, decreasing the amount that you pay back each month can result in a much larger debt than as borrowed.
Because of this, always ensure you repay your debt in full every month rather than letting it grow.
And finally, ensure you can always afford to pay back in full before borrowing any money - it's much easier to get in debt than it is to pay it off.