Don't want a credit card? Here's why you might need one

By Emma Lunn

If you're on top of your finances and don't need to borrow money to make ends meet, you might think you don't need to use credit. But think again. Here are four good reasons to get a credit card.

Improving your credit rating
If you're anxious about using a credit card, keep this in mind: Getting one could save you money in the long run.

When you apply for a loan (for a car or mortgage, for example), providers will want to see how responsible you are with your money and your debts. Yet if you've never used credit, lenders won't have any information to use to evaluate you-- and may assume the worst, giving you higher interest rates. Getting a credit card (and using it responsibly) can give lenders the proof they need to determine you're a good risk and worthy of a low interest rate. need-a-credit-card

"Not having many credit cards or loans can affect your credit file, as lenders are looking for signs that you are capable of repaying money you have borrowed," says Neil Munroe, external affairs and communications director at credit reference agency Equifax. "It is therefore worth considering opening an account or taking out a credit card to establish a credit history, even if you pay it off in full at the end of every month."

You might need it for emergencies
Who knows what financial emergency lurks around the corner? Although you might not need to borrow money to fund everyday living expenses, the unexpected can happen. If you have an expensive emergency (and not enough money on hand to pay for it), a credit card can be a lifeline.

"If a customer's car breaks down or needs urgent repairs, or if they are stranded abroad or have emergency bills to pay -- and they don't have immediate access to cash -- they know they have a convenient way to pay for it with the credit card in their wallet or purse," says Michael Donald, business development and commercial executive for MBNA. "Credit cards can give people the necessary breathing space to help them through those difficult times."

Extra protection
Purchases made on a credit card benefit from extra protection under Section 75 of the Consumer Credit Act. If goods or services worth between £100 and £30,000 are faulty, the credit card company is liable to the same extent as the supplier, explains Defaqto analyst Adam Richards-Gray.

"This protection extends to purchases abroad," Richards-Gray says.

Current economic conditions (which make businesses more likely to topple) make this protection especially valuable. For example, if the airline that was supposed to take you to your holiday destination goes bankrupt, and you bought your tickets with your credit card, you can use Section 75 to get your money back.

If you pay your credit card bill in full each month, you'll benefit from a cash-back or other rewards credit card. Cash-back cards give users a percentage of their spend back in cash, while reward cards allow you to build up points that can be spent on travel or at designated retailers.

Recent numbers from American Express show just how lucrative rewards cards can be. According to AmEx, the average family spends about £14,300 a year on everyday goods and services. If your family puts those expenses on a credit card (and pays it off every month), some of the money will go back into your own pocket -- an average of £253 a year, according to AmEx.

See related: Why landlords and employers want to see your credit file, Credit Counsellors share consumers' biggest mistakes

Published: 6 August 2012