Teaching your child the difference between debit and credit cards
Quick insights
- Debit and credit are two forms of payment that may be helpful to explain to your child for future financial readiness.
- Put simply, debit cards provide direct access to cash stored in your bank account while credit cards act as a type of loan which must be repaid later.
- Paying with a credit card can help you build credit, help protect your money and use various rewards features; however, it’s important to be aware of the potential risks, including the accumulation of debt.
A debit card withdraws money directly from the cash in a checking account, while a credit card draws from a line of credit that needs to be repaid. Though some adults still mix these two forms of payment up from time to time, knowing the difference can be essential to responsibly managing your money. As a parent, you may be wondering how to introduce these concepts to your child as they become increasingly independent young adults.
In this article, we’ll offer ideas to help encourage discussions about debit and credit in a family setting. Keep in mind, these suggestions are for a general audience, and it’s up to you to decide what is appropriate for your child’s developmental stage.
How debit cards work
It’s possible your child may already be familiar with using cash to make purchases. Because debit spending represents drawing from money in a bank account, it can be helpful to compare debit cards to buying things with cash. You may want to show them your debit card and explain that it connects to your bank account—the place where your paycheck is deposited and can then be spent using a debit card.
Depending on your comfort level, you may want to show them your bank account, including its balance and recent transactions. You can also take them to an ATM; withdrawing cash from machines associated from your bank generally don’t have withdrawal fees. While showing them the process of entering your PIN and receiving cash, emphasize the importance of guarding your PIN for security reasons—covering it even when nobody is nearby.
How credit cards work
Credit cards can be more complex to describe than debit cards, as they are not backed by actual cash in an account. So, take things step by step in your explanation. For a child-friendly description, it may be helpful to compare credit cards to an “I owe you” (IOU); you’re spending money you will repay later. Explain that anything you spend on a credit card needs to be repaid, ideally within the same billing cycle. Let your child know that spending money you can’t repay can cause problems, including owing more later than you initially spent.
Introduction to interest and debt
Depending on your child’s age and math level, it may or may not be appropriate to dig further into credit card debt. However, given that credit card debt is a serious topic affecting many adults, it’s important to consider explaining how a credit card’s annual percentage rate (APR) can lead to compounding debt. In addition to discussing budgeting basics and careful spending, you may want to emphasize using automatic payments to manage one’s credit account.
Why spend with a credit card?
Given the chance of accumulating debt, your child might ask: “Why would you spend money with a credit card?” The answer might be somewhat sophisticated for a young person to understand, but three (simplified) reasons include:
- Building credit: Repaying the money you spend on credit helps improve your credit score and demonstrates creditworthiness. A higher credit score makes you look more reliable when you want to get a loan or apply for an apartment.
- Security: If your credit card is ever stolen, you won’t be responsible for transactions you didn’t make yourself. (Note: This applies to debt cards as well).
- Perks: Some credit cards provide rewards for spending money, such as cash back or points to travel.
Credit is a big topic for kids, and it may be helpful to show them aspects of your own credit score and history to illustrate what it is and how it works. Chase Credit Journey® is a free online tool that allows you to view your score anytime, for free. This tool lays out important details about your credit use in a clear and understandable way, which may be beneficial to any adult or parent looking to gain and share insight.
Debit and credit spending for minors
At your discretion, you might choose to set your child up with a debit or credit card of their very own to help put their lessons into practice.
Bank accounts for kids
One way to help prepare your child for real-life financial responsibilities is to set them up with their first bank account and debit card. Different banks and financial services companies offer kid-friendly accounts intended to be managed with an adult’s supervision. Chase offers multiple checking accounts for kids and students to help introduce key concepts.
Credit spending for kids
While it’s less common to see credit products geared specifically to minors, parents may choose to add their child as an authorized user on their own credit account. As an authorized user, your child could carry a card with their name on it and spend money on your account. In addition to getting familiar with the functionality of a credit card, being an authorized user on a card can help your child establish credit history.
In conclusion
Debit and credit are key financial topics that can be simplified for a younger audience. Starting early with financial education can help prepare your child to be more independent and effective as they begin to manage their own money. As parents, it’s important to trust one’s judgment when it comes to your own child’s readiness for these topics and to explain them in an unintimidating way. With these simplified explanations, we hope that you have success with these discussions and consider Chase a resource for continued financial education.
