The Difference Between Debit and Credit Cards for Kids

Plastic and digital are the way of the world these days. Our kids see us using apps and plastic to pay for pretty much everything, and it’s important they understand how all of this works.

It’s not uncommon for parents to hand over their credit cards to their teens for the movies or shopping or for online gaming. As they get older, this behavior can create a habit or even the expectation that they can have whatever they want as long as they have a plastic card.

Here’s how you can teach them.

Explain that a debit card card is how they can pay for things with the money in their checking account. Once their checking runs out of money, the card no longer works. Just like they wouldn’t be able to withdraw cash, they can’t use the card until they put more money in the account. If they have a checking account (and we recommend they do as teens), show them in online banking how to manage and monitor how much they are spending. Explain that the goal is not to get to zero in the checking account ever, but to spend responsibly and in moderation.

Teach them that a credit card is a way of borrowing money they don’t have, and that paying it back comes with a price. It’s called interest. This is really important. They have to understand that borrowing money is not free. They also need to understand how making the minimum payment keeps them in debt longer.

Use the old-fashioned pen and paper if you have to and draw out a simple chart like the bullet points below. You do not have to use real interest rates or minimum payments. The idea is to give them something visual to see how much a small purchase can end up costing.

• Bought a video game on credit: $100
• Minimum payment due: $15 (that’s it? I can afford that)
• Amount you still owe: $85
• Interest charged on $85: $5
• Amount you owe now: ($85 + $5) = $90 (But I paid $15 already)
• Minimum payment due next time: $15
• Amount you still owe: ($90 – $15) = $75
• Interest charged on $75: $5
• Amount you owe now: ($75 + $5) = $80

In just two months of not paying back the full amount, the that $100 video game is already costing them $110.

Keep going that chart going to show them how much it could cost if they pay the minimum balance all the way to a zero balance and exactly how long it takes to get there.

Would you believe that a third of all teens don’t understand the difference between debit and credit? Don’t let yours be one of them.