Although some folks are wary of credit cards and warn us against “falling into debt” (my parents included!), credit cards are an exceptional financial tool. They’re a means to financial security, a way to build a viable credit score, and a way to learn about and leverage productive debt. Plus, many credit card companies offer bonuses and incentives to use their cards. Some companies provide cashback incentives, meaning you can earn money by simply using their credit card. This money can be deposited into your bank account or used to pay your monthly bill. Other credit card companies are paired with traveling services, like rental cars, hotel booking services, and airlines, meaning that Besides financial incentives, credit card companies generally offer better protection from frauds and scams than traditional debit cards or banks do. For example, some companies have 24/7 fraudulent monitoring, in which they’ll alert you if your social security number or personal information is being used by someone else. Most companies also have protection benefits, meaning that if your card or line of credit is hacked, the company will reimburse you.
Here are the main takeaways about why we choose credit cards: credit cards offer useful rewards, protections against fraud, and help you build a viable credit score.
Credit card debt is money owed to a credit card company. It’s composed of both the principle, which is the actual money you spend on a credit card, and the interest, which is the money that a credit company charges you to use their money over a span of time. Interest rates are often presented with the acronym APR, which stands for annual percentage rate. APR is the rate of interest that a loan--in this case, a credit card--accrues over the span of your borrowing. A lower APR means that when you pay off your monthly credit statement, you’re paying more of the principal (the actual money you spent on the credit card) than the interest (the amount of money the company is charging you to use their line of credit).
Credit card debt can become a financial burden when the APR is high and you aren’t able to entirely pay off your monthly bill. When there’s an outstanding balance (say, for instance, you’re only able to pay $300 of an $800 monthly credit statement), the credit company charges interest (the APR percentage) on the roll-over balance. This interest compounds over time, which can become financially troublesome. The key here is productive debt: accruing debt that can be easily paid off and that ultimately works in your favor.
In terms of generational indebtedness, Millennials and Gen Z have the highest increases in credit card debt, according to Credit Karma’s data across its 74 million users. So, it’s important to understand both the utility and potential risks of credit cards before opening too many lines of credit.
Credit card usage contributes to your credit score. A credit score is a three-digit value that represents your credit trustworthiness, and is an assessment of how you choose to use a given line of credit. It asks certain questions of your usage, like: are you paying all of your bills on time? Are you spending within your means? Are you opening too many lines of credit in a short amount of time? Credit scores are important for renting properties, purchasing a house or car, or beginning other significant financial endeavors. Lenders will check your credit score as a means to ensure your financial reliability. For these reasons, credit cards are important! (Along with your credit card, any loans that you take out are included in your credit score, like federal student loans, private personal loans, or a mortgage.)
Here are a few tips to maximize your credit card usage, especially when first starting to build credit:
