Teaching Kids About Debit & Credit Cards

If your kids are showing an interest in money, it’s probably time to talk about debit and credit cards. The earlier kids learn smart spending habits, the more likely they are to lead a financially healthy life later on. Read on for seven aspects to consider when teaching kids about debit and credit cards.

1. Credit vs. Debit

The first thing to explain to kids is the difference between debit and credit. Finding the right language will depend on age, but in general, you can say that a credit card means you are borrowing money that must be repaid later, whereas a debit card withdraws money directly from a checking account. Emphasize that if credit card spending isn’t paid back on time, you will owe more money the next month.

2. Fees and Interest

Kids need to know that financial products offer great benefits—but only when they’re used wisely. Spending with a debit card when you don’t have enough money in the bank may result in overdraft fees, and there may be fees for out-of-network ATM withdrawals. Credit cards accrue interest on unpaid balances which is compounded daily, and may incur additional late fees. Remind kids that when you have a card, it’s your responsibility to track spending and keep on top of payments.

3. Spending Limits

Sometimes, when kids see their parents spending with a card, it can look like endless funds are available. Explain that cards have limits. Credit cards have a limit on how much you can borrow, after which you may see declined transactions and fees. Debit card spending is limited to the amount in your account, and spending beyond this amount usually results in overdraft fees.

4. Credit Scores

While younger kids don’t need to know all the ins and outs of credit scores, you can still discuss the basics: everyone has a credit score, when you’re responsible with money your credit score is higher, and when you have a higher credit score it’s easier (and cheaper) to borrow money. Hop online and show your kids your own credit score, if you’re comfortable doing so. You might also mention that debit cards don’t affect your credit score in the same way.

5. Fraud Prevention

When you take steps to protect yourself from fraud, spell it out for your kids so they know why you are shredding old card statements, protecting your PIN at an ATM, or checking your card account frequently. If you are considering getting a card for your kids, talk with them about specific ways to avoid credit and debit card fraud, and what to do if they suspect criminal activity.

6. Choosing a Card

There’s no “right” age for kids to get their first card. Typically, teenagers around 13 can get a teen checking account and debit card, or a prepaid debit card that’s funded ahead of time. Teens can also become an authorized used on their parents’ account. At 18, kids may be ready for their first credit card—accompanied by plenty of education on responsible use. In all cases, choose cards that offer cash-back rewards and no gimmicks or hidden fees.

7. Ongoing Financial Literacy

Encourage kids to be engaged in money management and always learning something new. With an attitude of curiosity and excitement toward financial literacy, kids will be more prepared to make informed decisions about spending, credit management and other financial matters as they grow. You might get kids involved in family budgeting, organize a household allowance system, or simply talk about money matters—including debit and credit cards—more often as a family.