Plastic Is Fantastic!

Why you should have a credit card even if you don't need to borrow money.

The credit crunch means that credit cards and debt are continually getting bad press but credit cards don't have to be bad news. Here are five reasons why the dreaded plastic can be a good thing:

Paying it off on time will improve your credit rating

If you're young or have never borrowed money before, you won't have much of a credit history. But when you apply for anything from a mortgage to a mobile phone contract, providers will want to look at your credit history to see what you're like at handling money and paying debts on time.  The better your credit score, the more likely they are to lend you money and the better the rate you'll get.

So, even if you don't need to borrow money at the moment, it can be worth getting a credit card and putting occasional purchases on it. Just make sure you pay it off each month to avoid any interest payments. Once you have a proven track record of this, lenders will see you as a better bet for other products later on.

I actually learnt this the hard way by making it all the way to my late 20s before getting my first credit card. However I suffered for my sensible attitude when I applied for my first mortgage. The first lender I applied to turned me down because I didn't have much of a track record with credit, and so represented an "unknown risk".

You might need it for emergencies

Who knows what's around the corner? One day you might be happy plodding along with everything going ok, the next you have to fork out £500 to fix your car or £3,000 to be airlifted off a mountain after a nasty ski accident. Although your travel insurance should cover you in the latter example, there's always the small chance that your rescuers will want to see the colour of your money before sorting you out.

And what if you're cheerfully sunbathing on your sun-lounger in a remote corner of Europe when a TV news flash alerts you to the fact your travel agent or airline has gone bust? Budget airline Zoom went to the wall last month and XL wasn't far behind it. Many XL customers were chucked out of their hotels when it became apparent that XL hadn't paid the bills, and some had to find and fund their own flights home too. Unless you always have a few grand sitting in your current account, a credit card can be vital in this kind of situation.

Furthermore, you usually cannot hire a car without a credit card - as many people discover too late when they arrive abroad.

Extra protection

One advantage of paying for goods or services with a credit card is that, under section 75 of the Consumer Credit Act 1974, if there's a problem the credit card company may be liable to the same extent as the supplier.

For a credit card company to be liable, the cost of the goods or service must be over £100 and under £30,000 and there must be a claim for breach of contract or misrepresentation against the supplier. It's a good idea to complain to the supplier first but if they won't help or have gone bust such as XL or wedding list company WrapIt, you can claim against the credit card company.

Extras

Several credit-card companies will give you with a free extended warranty on household appliances purchased using their card. Given that shop-bought extended warranties are usually a complete rip-off, this free benefit is certainly worth having - and using.

Others, such as the Egg card, offer `travel accident cover' which covers cardholders while they're travelling. Although no substitute for comprehensive travel insurance, it might come in handy.

The American Express Platinum Card includes a travel insurance package that covers personal accident, loss of luggage and travel delay claims, as well as medical cover and cancellation. You are also covered for the theft of items bought on the card within 90 days of the purchase.

Alternatively the Capital One Cashback Card includes travel insurance which covers you for cancellation, personal accident, lost luggage and delays. However medical expenses are limited to £50 a day for every day you're in hospital.

Cashback

Cashback cards offer users a percentage of the money they spend back in cash.  However paying off the bill each month and avoiding paying any interest is key when it comes to making the most of cashback cards. Fail to do this and you could find that any cashback gained is wiped out by interest payments.

The best deals around at the moment include the American Express Platinum Card. Users get 5% cash back for the first three months up to a spend of £4,000 and after that 0.50% on spend up to £3,500 per year,  1.00% on spend between £3,501 and  £10,000 per year and 1.50% on spend over £10,001 per year.

Similarly, the Barclaycard OnePulse With Cashback Visa offers 5% cashback when you buy a tube or bus ticket from Transport For London, plus 0.5% cashback on all other spend until 31^st December (maximum £15 cashback per month).

Alternatively, the Egg Money Mastercard offers 1% cashback on all spend and Smile Classic Visa 0.5%.

> Compare credit cards at Fool.co.uk