Understanding the ins and outs of using credit sensibly is an important part of getting your personal finances in good shape. And it’s even more important at the start of the year. With the cost of Christmas reaching £1,500 per person according to recent statistics, it’s no surprise that many turn to credit during or shortly after this time. This is borne out in official data too. The UK Cards Association revealed that in the first three months of 2016 the number of credit card purchases was up by 10.5% on 2015.

This isn’t necessarily a bad thing. Spending on credit sensibly can have big benefits. Some of the best reward credit cards available give you £165 in cashback annually. Plus, some American Express reward cards offer 9,000 Avios points when you spend £1,000 in the first three months of membership. Avios points can be spent on flights, Eurostar tickets and hotels, which could result in big discounts.

Don’t forget too that the average consumer could save over £1,000 by switching a credit card balance that they are paying interest on to a 0% balance transfer deal, according to our latest research. And if you’re eligible for some of the best products on the market, there’s also no need to pay interest on your purchase.

‘Misusing credit can be costly’

Yet despite all the benefits, not spending sensibly on credit can be expensive. And people need to remember this. The trouble is, most consumers fail to understand the basics of how a credit card actually works, so they don’t always know where these dangers lie. As a result, many are at risk of misusing credit. This can be costly.

High monthly interest bills, late payment fees and cash withdrawal fees are just some of costs involved if you’re not careful. Consumers need to approach credit with caution. Why? Because the extra charges that come with using credit can be hidden in the small print. Late or missed payment charges vary from lender to lender, but can cost up to £12 a time, while cash withdrawals can charge anywhere around 3% of the amount you withdraw. And there’s often a minimum fee of around £3 on top.

There are things you might not realise, too. The exact same fee for cash withdrawals often applies to using your credit card to fund gambling. If you put £2 into an online prize-draw, you could end up paying more in charge fees than the original betting amount. The same applies to people who use a credit card to gamble online. That’s why it’s so important to be crystal clear on the terms and conditions of your credit card and spend sensibly.

According to our research, nearly half of Britons don’t know the charges incurred from withdrawing cash from an ATM or exceeding their credit limit. And more than a half of Britons don’t know what the Annual Percentage Rate (APR) is on their credit card. Without a full understanding of how much it costs to pay back the money borrowed, including any fees and charges, people run the risk of paying back more than they need to.

Lenders must do more

So, what can be done about this? Firstly, the onus should be on lenders to do more. They should offer crystal clear borrowing guidelines, in a format that can’t be ignored. Sending a brochure of terms and conditions in the post isn’t enough. Terms and conditions are often crammed full of legal jargon which, although essential, isn’t always explicit or helpful for their customers.

It should be the providers’ responsibility to ensure their customers are clued up on the credit they are using. Providing a simple glossary of terms would help, or updating mobile banking technology to provide more guidance would be even better. Some providers do offer online guides to understanding the basics, but these are often hidden among other sales and marketing materials on their websites.

Secondly, financial education needs to be instilled in us all from the very beginning. In September 2014, the government introduced financial literacy lessons for secondary school pupils, ensuring local authority-governed schools teach money management in maths and citizenship lessons.

Although implementing financial education in the national curriculum was a landmark achievement, this is still building momentum. As a result, previous generations have received little to no guidance. According to our research, just two-fifths manage to pay their credit card off each month, compared to the UK average of three-fifths. What’s more, almost one-fifth of millennials have been rejected have for credit in the past 12 months based on their poor eligibility – the highest level of rejection for all surveyed age groups. A lack of financial education has clearly affected part of this generation who have missed out

Although it’s still a work in progress, we hope that greater financial education will instil the importance of spending sensibly on credit. Once consumers have a greater understanding, they will be able to shop around with confidence to ensure they receive the best deal.

Alastair Douglas is chief executive of TotallyMoney.com