Teaching Your Kids About Debit and Credit Cards

Remember when you got your first debit card or credit card? It's the first time a young person truly experiences a sense of financial independence, even if they're still living under Mom and Dad's roof. It's an exciting time, but if kids don't understand the rules and consequences associated with this financial freedom, they may soon find that being independent wasn't quite as glamorous as they expected. Here are some things you should discuss with your children as they set out into the world of money.

The difference between debit and credit cards

It’s important that kids understand the difference between a debit card and a credit card. Explain that money spent using a debit card comes directly out of their bank account, and they must keep track of how much money is available in the account. Money spent using a credit card is borrowing someone else’s money, and it must be paid back with interest. Explain that different credit cards offer different rates and limits. Be sure they understand how the credit card debt will increase if they pay only the minimum amount due each month, and what might happen if they miss a payment date.

Credit card limits

Explain that having a credit card can be helpful, but that maxing it out isn't the best strategy for a good financial future. Explain how it's best to keep the card’s balance well below the limit and to pay off debts as quickly as possible.

Credit score

Many people wreck their credit when they're young simply because they don't have the life experience to truly comprehend the importance of their credit score. Explain how it will affect their efforts to make significant purchases later in life, such as cars and houses, as well as their ability to secure important loans. If you've personally struggled with your credit score at some point in your life, draw on your own real-life experience to help get the point across. Point to times when having a good credit score has helped you.

When to use a card vs. when to use cash

It's a good idea for kids to know when they should be using a card to pay for something versus when it's better to use cash or a check. Make sure they understand how to write a check and how to make cash withdrawals using their debit and/or credit card. Also make sure they understand the terms or fees that may be associated with ATM use or cash withdrawals from a credit card.

Pros and cons of credit cards

Make sure kids understand the advantages and disadvantages of credit cards. Using credit cards responsibly can be a good way to build a positive credit score. They are also useful for emergencies, and for important purchases that are simply too costly to pay for out-of-pocket immediately. However, they can also make it easy to quickly rack up an unmanageable amount of debt, with negative long-term consequences.

Fees

It's easy for kids (and even some adults) to overlook the fees associated with credit card use. Kids need to be familiar with all of the card's terms to avoid having to pay unnecessary fees (for example, for late payments). For debit cards, they need to be familiar with the terms associated with their bank account, which may include fees for overdrafts or returned checks.

Where to get help

Here are some resources that can help you get started:

https://money.usnews.com/money/blogs/my-money/2012/01/12/how-to-teach-your-kids-about-credit-cards

https://www.fdic.gov/consumers/consumer/news/cnspr08/managing.html

http://blog.famzoo.com/2013/04/credit-card-tips-for-teens.html

Nevada State Bank^© volunteers also teach "Banking on Your Future" lessons to students and young adults in the communities we serve. This program includes basic financial information, such as banking, credit, identity theft, apartment rental contracts, and employment. We also support the financial literacy efforts of Junior Achievement and the American Banker Association's annual "Get Smart About Credit" and "Teach Children to Save" events. If your child’s school offers these lessons, be sure that your child attends, and discuss the lessons with them afterwards.

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.