Do you need a credit card?

Many of the cheap and easy deals are gone as lenders tighten their purse strings. But credit cards can still be helpful on a shopping trip. Just think carefully about whether a particular card is right for you, or if you even need one at all.

As with all forms of credit (including store cards and affinity cards), you must be over 18 years of age before you can apply for a credit card. Credit cards are best to use if you want to borrow a small amount of money for a short time. They're ideal for people who have the means to pay the money off quickly, and who are good at budgeting. The APR (annual percentage rates) is usually high and if you don't pay off the balance, your debt can add up quite quickly over the months. Shop around because interest rates vary significantly, but be wary of special offers. Some cards offer free credit at the beginning only to crank up the interest later on. 

How they work

If you do not pay off the full amount outstanding at the end of the month interest will be added daily to the amount left to repay. You have to pay off a minimum amount each month, which is usually 5% of the outstanding balance. Remember to leave enough time for your payment to the credit card company to go through. It normally takes three to five days, so be aware that if you miss the payment date, you will be charged interest.

You will have a limit to how much you can spend on the card. If this is too little you can apply for an increase. Alternatively, some people like to have a low limit to control their spending. If you do want to borrow money over a longer period of time it might be cheaper to arrange a personal loan.

Credit cards can be useful if you want to spread payments for an item. For example, you could use the card to buy an expensive piece of furniture and then spread the repayments out over a few months. This isn't good value if your credit card has high interest charges (APR), or the repayments go on for too long.

Credit cards mean that you do not have to carry cash around, and if you purchase goods or services that exceed £100 you have some extra consumer protection by using the card.

Added extras

You can withdraw cash using most credit cards, but interest is charged from the day of withdrawal and you may also be charged a small fee, so you should only use this facility in an emergency.

Credit cards are also very useful if you are abroad, and allow you to withdraw foreign currency, but you are usually charged a moderate fee for using the card abroad, too.

Some credit card issuers also offer purchase protection - temporary insurance against damage to your goods or theft - and this is generally free of charge. Payment protection can also be arranged at a cost, which is designed to pay the monthly repayment if, for example, you're made redundant, or cannot work due to an accident or sickness.

Which card?

• If you're already in debt, not very organised or good at handling money, or unlikely to travel abroad any time soon, maybe a credit card is not necessary for you. They're not compulsory, are you sure you need one?
• Most banks or building societies charge you an annual fee for the card, as they are lending you money. This fee is generally about £10 to £15 for standard credit cards and sometimes more for a Gold or 'preferential' card.

• Some cards have no annual fee, or don't charge the fee if you spend more than a certain amount each year. Some credit cards give you one or two months free credit, so if you're organised and pay off the amount due each month it can be a convenient money source.

• Many cards now have introductory offers, such as 0% charges for six months on balance transfers from your old card. This can be a godsend if you think you'll be able to pay all or most of the money off within that period. But there's usually a high fee involved and you could be landed with a very high APR at the end of the interest-free period.

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Updated: 17/10/2011