Financially Free Gen Z

Episode 2: Credit Cards… Dun Dun Dun!

Emma: Welcome to financially free Gen Z. I'm Emma Barger Marketing Specialist at Coulee Bank.

Rachel: And I'm Rachel Munger, a Communication Specialist at Coulee Bank.

Emma: In today's episode of our podcast, where we discuss all things finance and money for Gen Z, we will be talking about credit cards... Dun dun dunnn!

Rachel: So, Emma, could you talk a little bit about how credit cards actually work?

Emma: Yeah. So in a really basic manner, you make a purchase and then the bank or financial institution will loan you the money to make that purchase. And then you have to repay that purchase or that amount back each month. And there's a few different types of options. You can make a minimum monthly payment, a partial payment, or the best option, pay off your entire balance.

Rachel: Okay. And so what are the benefits to paying off your entire balance each month?

Emma: So paying off your balance each month, there won't be any interest that accrues. Credit cards then can be kind of thought of as a short term, interest free loan.

Rachel: Okay, that makes sense. So if I'm paying off my payment every month, I'm not going to accrue interest on the stuff I'm charging on my credit card and I'm not going to be paying any extra money for this stuff that I'm buying.

Emma: Correct! So there are a few other benefits of credit cards. A lot of them have rewards programs. I know a lot of them have things like rewards on flights or hotels, cash back. It also can be safer than carrying cash just for security purposes. And it offers a stronger fraud protection and it’s also one of the fastest and easiest ways to build credit, which is something for our generation, can be difficult and takes time.

Emma: And it's also easy to track spending, which kind of leads us back to our budgeting episode we had last time.

Rachel: Yeah, I know a few of those benefits are reasons that I finally started using credit cards because for a long time I was very resistant to the idea of it. I just wanted to use my debit card and call it good, which there is definitely a situation for that. But yeah, it was like, I can get money back, I can like build my credit and stuff like that.

Rachel: And so that encouraged me to make the switch over to credit cards.

Emma: Yeah.

Rachel: There are some things to consider with credit cards that there is potential for things to go wrong. And this really comes down to whether or not you're ready to take that step and transition over to credit cards. If you opt to not pay your credit card balance in full each month, there's the potential for interest to add up really quickly.

Rachel: I know, according to Forbes, the average interest rate can range between 16 to mid-twenties on credit cards, and that's average across the board. And so those are higher rates than you're going to get on like a more traditional loan or something like that. And so if I'm spending $1,000 on my credit card every month and I'm not paying it off in full and I have a high rate on that, it can start to add up really quickly and become unmanageable.

Rachel: So once that interest begins to accumulate on the unpaid credit card, it can become hard for people to escape. And that's where you hear of those kind of horror stories of people who end up in a quarter of $1,000,000 in credit card debt and they can't get out of it. So you really need to be prepared and responsible if you're going to use credit cards.

Emma: Right. And Rachel, you talked about it a little bit earlier about how you were a little bit nervous to start credit cards, as was I. I always thought of it as a big, scary thing. And the horror stories really do get to your head when you think about it. And so I feel like that's why a lot of Gen Zs, like us, are less inclined to hop on the credit card wagon.

Emma: We also have just that fear of falling into a debt spiral, like you're saying, where we're just constantly playing catch up. We also have lack of access to credit, so you need credit to build upon and be able to get opportunities. So you have to start somewhere and that can always be a little bit difficult. And I feel like now, especially since my online shopping has gotten a little out of hand, I've seen a lot of the BNPL, Buy Now Pay Later.

Emma: So yeah, that is definitely something too that's probably affecting our generation and.

Rachel: Yep. Yeah. They say a large group of Gen Z is opting to use buy now, pay later rather than credit cards because they sometimes view it as a safe, safer option, which is not necessarily true. You might not upfront see those big interest payments, but if you do miss a buy now, pay later payment, you're still going to end up with some sort of additional charge.

Rachel: And so there's a lot of different options for buy now, pay later. If you haven't heard of them, there's like Affirm and Afterpay and Klarna and a lot of the times you'll see these if you're doing some sort of online purchase at the end of your checkout, it'll say, You can do this in four interest free installments over like a month or something.

Rachel: And most commonly it's used on like clothing purchases, electronics, furniture, appliances, those sort of payments. So there definitely can be a good use for them, but it's the same as credit cards where you just have to be responsible and not spending outside of your means and just know that eventually you're going to have to pay it like it's not free money.

Rachel: So.

Emma: Right. Right. And I think the biggest thing is, is... don't get a credit card if you can't handle it. I feel like it's 100% okay to wait until you're ready to take on that responsibility, because it is a responsibility. It's not just free money. It can't just be thought of it like that. And going back to our last episode about budgeting, if you have a tendency to overspend and you know this about yourself, especially if you started implementing a budget. A credit card, might not just be the best option at this point in time.

Emma: It could it could lead to some some problems.

Rachel: Yes, definitely some potential for debt. But if you are ready for it, there are a lot of great benefits like we talked about before. And it is a chance for you to start building credit earlier rather than later. So if eventually you're wanting to get an auto loan or a mortgage or something like that, you have credit history because credit history is something that's factored into your credit score.

Rachel: So even if you've, like, never missed a payment and like on paper, you would think you'd have a great credit score, but if you've only had credit for six months, that affects your credit score a lot. So just something to keep in mind.

Emma: Yeah.

Rachel: Next up, we have a guest from Coulee Bank who's here to discuss a little bit more about credit cards and how powerful they can be if they're used correctly. So with us today, we have Jason Vaugh, Retail Market Manager at Coulee Bank. We just want to say thank you, Jason, for joining us today and sharing your knowledge.

Emma: Yeah, thank you.

Rachel: So first off, could you tell us why you think it's important for younger generations to be knowledgeable about the power of credit cards, both good and bad?

Jason: Yeah, I think like you guys stated, you know, a lot of individuals, especially younger generation, don't really understand how to use their credit cards. And I've always advised for people for years, especially those new to credit, to get their first credit card and not even necessarily use it. What most people don't know is that you could get a credit card and you can just cut it up when you get it.

Jason: And then the credit reporting agency will credit you a positive mark on your report every month for 12 months. So that's kind of a quick way for you to build credit and quickly, as you alluded to, to be able to make more financial purchases later on.

Emma: That's awesome. I didn't even know about that.

Rachel: Yeah, that's really smart.

Emma: All right. So as a Gen Zer myself, the thought of debt really does scare me. So based on your experience personally and as well as being an industry professional, what would you say to someone who might be intimidated or scared of debt?

Jason: Well, the first thing I would say is that you should never be afraid or scared of debt. You know, obviously, there's good debt and there's bad debt and just by knowing and understanding the difference, you know, you can definitely make better choices when it comes to that debt. So, for example, like a good, you know, debt would be purchasing of a home.

Jason: Most people don't have the cash to purchase a home. So you'd go out and get yourself a home loan and, you know, purchase an asset that then builds equity later on that you could maybe even use to purchase another home or to even start a business. Speaking of businesses, business loans are another great loan that you can get for some of us.

Jason: We're not used to working in an office space or, you know, we don't want to work in an office space. So we are a little more free and we want to be able to create our own business and create our own thing. And business loans are a perfect opportunity to do that. So obviously, you know, bad debt, credit cards can be bad debt.

Jason: Just like you said, if we get into that financial hole, we're only making those minimal payments and we're not paying down our balances. But also some of the other debts that you can get yourself into that would be considered to be bad, would be like predatory car loans or title loans or doing those payday loans that can be 120%.

Jason: So you definitely want to avoid those as much as you as possible. And, you know, come see a financial person before you go to one of those institutions.

Rachel: Yeah, I know a lot of those payday loans can really just be a financial literacy thing. Like if if you don't know what you're getting into, it's very predatory and can set you up for failure. So if someone is interested in getting a credit card or has questions about how to responsibly use one, what would you recommend they do?

Jason: Just like with anything. If you're not knowledgeable, find somebody who's an expert in that area. So most of time you can visit, you know, like your local financial and maybe speak with a banker or an advisor there. And they will be able to, you know, walk you along that path. And I would say, obviously, if you don't have a financial or someone that you can call, you can always contact us here at Coulee Bank.

Jason: We're more than happy to provide any answers for you to your questions and help guide you along your decision making process and put you on that path of financial stability.

Rachel: Awesome. Well, thank you for joining us. I think the number one thing I was able to take away from that is the idea of getting a credit card and not even necessarily using it.

Emma: Yeah. And honestly, like being a recent graduate of college, I have quite a bit of debt myself and so it's really reassuring to hear that, you know, not all debt is bad debt and it can help me in my future, especially if it is, you know, couple of years down the road, hopefully a little more when I you know, I'm thinking about taking out some big loans.

Emma: Again. So I learned a lot about credit cards and I feel like they can be really powerful. And this has been kind of an empowering experience for me. And I do have credit cards. Two of them. Both of them don't really have that great of rewards. I feel like I might need to rethink my decision and maybe find something that works a little bit more for me.

Emma: So, I mean, I. I love the idea of cash back. I feel like that could just, you know, maybe cover my morning coffees or add, add something to my daily routine that would be nice just to be covered just by, you know, consistently using a card on groceries or gas.

Rachel: Exactly.

Emma: Whatever it might be.

Rachel: I think the card that I currently use, it's like one and a half percent cash back or something, which doesn't sound like a lot, but I do all of my purchasing through that card. And so at the end of the year, it does come out to a decent sum of money that was saved.

Emma: Right. Right. And especially also like now that we're finally getting back to normal life and the thought of, you know, COVID is a little bit further behind us and we're all getting more comfortable with it. I feel like maybe even for those that are really into traveler, want to find some new experiences like we mentioned earlier, those ones with the hotels or the flights might be a good option.

Emma: I mean, I haven't been a big traveler for the last couple of years like many others. But, you know, down the road, that might be something I would want to consider, too.

Rachel: Yeah. And I do know it's also important to not go, like, way out of hand, where you'll see some people who have, like, 20 different credit cards and.

Emma: Right.

Rachel: Each time you apply for a credit card, it does reflect in your credit score a little bit. So if you are in the process of like trying to buy a home or get another sort of loan, just be aware of that. Like if you are in a clothing store and they're like, do you want to save 20% by opening this credit card?

Emma: It’s so hard to turn those down.