Debit and credit cards are the two most commonly used payment methods today. According to the Consumer Financial Protection Bureau’s 2021 Consumer Credit Card Market Report, more than 175 million Americans have a credit card. And according to a 2022 report from S&P Global Market Intelligence, consumers’ debit card preference surpassed credit cards for the first time in 2022.
As our world becomes increasingly cashless, it makes sense to teach our kids how to responsibly use debit, credit – or both. Financial literacy can help kids manage these cards in a way that maximizes their benefits and minimizes their risks.
But which one is best? Both credit and debit cards have their own advantages and potential disadvantages that will factor into a parent’s decision. Ultimately, the best option is the one that helps the child develop financial independence.
What about cash?
Giving a credit or debit card to a child can feel like setting your wallet on fire. However, there are good reasons to choose plastic over cash. The number of cashless businesses is increasing around the world. Particularly relevant to parents of children and teens, entire school districts have gone cashless for sporting event tickets, concessions, and other school-related activities.
One reason for this transition is security. Paper money lacks the security of credit and debit cards. A stolen wallet of cash is gone forever, but a lost or stolen card can be locked and replaced.
Plus, according to the Identity Theft Resource Center’s 2022 Annual Data Breach Report, transacting exclusively in cash won’t allow kids to learn how to protect sensitive financial information.
Credit Cards for Kids: Advantages and Disadvantages
Credit and debit cards may look alike, but they work very differently: A credit card lets you borrow money from the issuer while a debit card takes money from your bank account. This difference is at the root of many of the benefits and drawbacks of both types of cards.
A credit card is essentially a means of taking a loan; Thus, you must be 18 to obtain one. If your child is under 18, the only way for them to “get” a credit card is by adding them as an authorized user to an existing account. An authorized user is allowed to use the card but is not responsible for paying the bill. However, some issuers have age restrictions even for authorized users, so check with your card issuer to see if your child is old enough to be added to your account.
Potential Risks of Credit
Giving a minor unfettered access to your credit limit can have serious financial consequences. That’s why Jessica Pelletier, executive director of FitMoney, a nonprofit that provides free financial literacy courses for K-12 schools, advises parents to be “more careful that an authorized user is determined to be an authorized user.” There are limits.” The child can add up to charges that increase your credit utilization ratio, and you’ll be charged interest if you don’t pay off the balance. A high credit utilization ratio and just one late payment can lower your credit score.
Only American Express allows primary cardholders to set spending limits for authorized users on all of their consumer cards. In the absence of that technology on your credit card, you and your child may have a contract that sets out spending limits and the consequences of exceeding them. You can also monitor your child’s spending by logging into your account regularly, and setting up alerts that notify you when purchases are made or when you’re close to maxing out your credit limit.
positive effect of credit
When used responsibly, however, kids can reap lasting benefits from credit cards. Unlike debit cards, credit card companies report to three credit bureaus. Being an authorized user can build a child’s credit score in two ways. Many issuers report user activity for authorized users in addition to the primary account holder. (Some issuers only report this information if the child is a certain age; ask the card issuer what their policy is.) So if you as the parent are sure that you will make on-time, full credit card payments , your child can “piggyback” from that good credit history. Also, an authorized user gets credit for the age of the account, regardless of when they were added to it. Because length of credit history is a factor in credit scores, it may be best to add your child to their oldest credit card account.
Helping your child build his credit score is an invaluable gift. A good credit score can help them secure a job, get a lower interest rate on the loan and when the time comes, an excellent credit card of their own.
Debit Card for Kids: Advantages and Disadvantages
For parents who want to teach their kids about paying with plastic, a debit card may seem like a more natural first step. Prepaid debit cards are an alternative to sharing your debit card with your child. You can buy them practically anywhere, and parents can control how much money is available to spend on the prepaid card. However, prepaid debit cards can also have fees and generally lack mobile banking capabilities.
If you’re considering starting your child off with a traditional debit card, here are some factors to consider.
Downsides to Debit
As with credit cards, there is a real potential for overspending with debit cards. As such, Pelletier cautions against giving a child a debit card that’s linked directly to a parent’s checking account. A child who hasn’t yet learned to spend responsibly may go on a shopping spree, eating up money in the bank for bills and other expenses. Kid-specific debit cards may be a more secure option. The child gets a debit card linked to a separate checking account that is owned and managed by the parent. Parents can set spending limits and keep track of their child’s spending habits. Many of these debit cards for kids also allow parents to assign chores through the app and deposit the money after they’re done. Note, however, that some of these debit cards for kids charge a monthly fee.
Debit cards also have lower consumer and purchase protections when compared to credit cards. If your debit card or card information is stolen and fraudulent charges are made, you may not be responsible for them – but it depends on when you report the loss. The credit card still takes a loss on the $50 when the cardholder reports the fraudulent activity.
While debit cards can teach important money management lessons, they will have little to no effect on any other long-term aspect of your child’s financial health. Debit card use isn’t reported to the three major credit bureaus, so it won’t affect their credit score — no matter how responsibly your child uses the card.
where debit shines
Accessibility is probably the biggest argument in favor of debit cards over credit cards. Some debit cards do not have a minimum age requirement at all and may be the only option if the child is very young.
Spending with a debit card can also seem more tangible because purchases reduce the available balance in a checking account almost immediately whereas credit card purchases can be paid for later. The immediacy of debit card transactions can encourage kids to budget and be intentional with their spending. And because debit card purchases are made with money that’s already in a checking account, you won’t have to worry about paying interest on unpaid balances.
Credit and debit cards can be excellent, if not essential, tools for helping kids learn how to manage money. But they both come with inherent risks that parents should consider if their child is ready for the privilege of a credit or debit card. Those risks become even more real once the card is in a child’s hands, making parental guidance essential.
“I don’t want parents to think that they can get the child to have a card and now we don’t have to talk about it,” Pelletier says. “A card is great when it comes to education and discussion.”