Blog Highlights
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Benefits: Learn how to use credit cards as a financial tool to build credit, earn rewards, and enjoy greater flexibility and fraud protection.
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Risks: Understand how overspending, interest charges, and hidden fees can turn credit cards into a financial nightmare.
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Smart Use: Discover practical tips for using credit responsibly so you can enjoy the perks without falling into debt.
Credit cards sometimes get a bad rap, but the truth is – whether they're your friend or foe depends on how you use them. Some people choose to avoid credit cards completely (out of fear or spending habits), while others see them as an essential financial tool. Here are some benefits of responsible credit card use, as well as the risks when they're misused.
Credit Cards as Powerful Financial Tools
Credit cards can be a powerhouse for your finances when used wisely. By understanding how to use credit responsibly – such as paying balances in full and monitoring spending – credit cards can be a savvy way to boost your financial position.
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Build Credit: Making on-time credit card payments and keeping balances low (below 30% of your available limit) is the key to maintaining a strong credit score.
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Rewards and Points (Say Less): Many credit cards offer reward programs with special perks and benefits adding big value to your purchases. Just be sure to not spend extra money on things you don't need just to get more points.
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Fraud Protection: One of the big advantages of using a credit card versus Cash App or Venmo are the protection policies and liability limits that offer stronger protection against fraud.
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Emergency Situations: Having a go-to when surprise expenses come up is a huge benefit of having a credit card. It gives you peace of mind knowing you'll have the funds to get you through.
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Financial Flexibility: Using a credit card is convenient for everyday purchases and travel. It helps you to easily track expenses and eliminates the need to carry as much cash. Plus, if you're using a rewards card, you'll reap those benefits too!
Credit Cards as a Dangerous Weapon
Credit cards can quickly become a dangerous tool if they aren't managed carefully. Without disciplined use and caution – using a credit card can quickly turn into a financial nightmare.
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Overspending (Big Yikes): Maxing out or juggling multiple cards not only hurts your credit score, but it can also lead to expensive monthly payments that'll leave your budget cooked.
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Minimum Payment Trap: While the minimum payment amount is technically all that you're required to pay, it's important to know that the balance keeps accruing interest and paying only the minimum payment can keep you trapped in a never ending debt cycle.
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Carrying a Balance: Keep in mind that interest is added to your balance. That $20 purchase could end up costing you $75 (or more) if you allow the interest to accumulate before paying the balance in full.
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Fees Everywhere: Instead of accepting random pre-approved offers you received in your inbox, “shop” around for the best credit card. Things you should look for include annual fees, late fees, and over-limit fees. No one likes to pay extra fees, so the best place to find a credit card with good rates, low or no fees is at your local credit union.
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High Interest Rates: The most important thing to pay attention to when using a credit card is the interest rate. Credit card interest compounds daily, meaning the daily accumulation of interest on your charges is added to the principal (original balance) every day.
How Daily Compound Interest Works
Daily compound interest is the day-to-day accumulation of interest charges on your balance, where the interest from previous days is added to the principal (original balance owed).
Daily Interest: A percentage of the total balance is calculated as interest for that single day – known as daily interest.
Added to Balance: This daily interest is then added to the balance.
Next Day Calculation: The following day, the interest is calculated on the new, larger balance (which includes interest), rather than on the original amount you borrowed. As balances remain and continue to grow with interest, new charges only add to the problem – making it feel like you’re running in place financially.
How Gen Z Should Use Credit Cards Wisely
Getting a credit card is a smart choice only if you use it wisely. Here are some practical tips to help Gen Zers make the best choices when using credit cards.
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Less is More: Start with one credit card and use it for small, manageable purchases like gas. Also, keep balances under 30% – a low credit utilization is a big W!
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Treat Your Card Like Cash: Don't rack up a balance more than you can afford to pay off each month. Remember, a credit card is a loan, not extra income.
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Set Up Autopay: Automatic payments helps avoid late fees, missed payments and protects your credit score. If you're able to, pay more than the minimum – an extra $5 or $10 can make a huge difference!
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Keep Tabs on Spending: Track spending with mobile banking or use another budgeting template. This way you can see how much you're spending (FRFR), quickly spot errors or fraud, and most importantly, curb bad habits.
Make Credit Cards Your Friend with Smart Spending Choices
Using credit cards responsibly allows you to reap financial benefits, gain independence, and achieve your goals. We invite you to learn more about using a credit card responsibly. Check out a few helpful blogs below:
If you want to learn more about credit cards and shop our options, contact us or visit a branch near you today!
