Explaining the Difference Between Debit and Credit Cards to Your Kids

Congratulations! You successfully explained the concept of a debit card to your child. Now that your son or daughter has mastered the concept and had some experience using one, it’s time to explain how a credit card works and how it differs from a debit card.

In simple terms, you can explain the primary difference this way:

In order to use a debit card to purchase something, you have to already have the money in your bank account. When you use the card, that money is immediately withdrawn from your account and you can see your balance go down. This distinction is important because it means you can’t spend more than you have.

By contrast, a credit card does not require the funds to already be available in your bank account. Instead, they allow you to purchase up to a certain amount using the card, which is called your “credit limit.” There’s no immediate impact on your bank account balance, but you are expected to pay the money you spend using the card back to the credit card company every month.

If you’ve already talked to your children about the concept of IOUs, you can explain that a credit card is exactly that: an IOU to the bank. Every time you use the card, you’re giving the bank an IOU and promising to pay them back. (If you haven’t talked to your kids about this concept, read our post, “How to teach your kids the concept of debt and an ‘I owe you’.”)

Using a credit card has some advantages, with one of the biggest being that it helps establish good credit, which can be important when your kids are ready to buy their first car or home. It can also be easier to fight fraud when you use a credit card.

Banks often offer online budgeting technology with their credit cards, so your college kids can see exactly where they tend to spend the most. They might think it’s at the grocery store when, in reality, it’s dining out.

Another advantage can be the reward points and special promotion programs associated with certain credit cards. For kids, though, I’d only go this route if your child is extremely disciplined about spending. It can too tempting to use the points and promos awarded to cardholders. While these rewards can provide fiscal advantages, they can also serve as an incentive to overspend. Saving 30% is great, but not if it means your child can’t pay his credit card bill at the end of the month.

Explain to your child that if he’s shopping and the store offers to sign him up for a store card for “free,” there’s a catch. Stores make a lot of money off of the interest and fees they charge, which means it’s in their best interest for your child to overspend. If your child accidentally overspends and can’t pay his credit card bill off in its entirety every month, the interest and fees can really add up. He’ll end up spending significantly MORE for the item than its original cost. No reward program is worth that!

When should my child get a credit card?

In my opinion, it’s more about if they’re ready to get a card, than when they should get one.

The main criteria is that you’ve had plenty of conversations and your child understands the differences between credit and debit. I’d recommend starting these conversations early in their high school years, discussing the differences, pros, and cons long before they ever use one.

Theoretically, you could give your child a credit card that’s actually in your name, perhaps even an “emergency credit card” when they’re in late high school or college. (An emergency credit card is exactly what it sounds like: to be used only in case of emergency, not at Taco Bell.) The idea would be that they’d have the protection of being able to pay if something unexpected happens, but this doesn’t teach them about budgeting or not overspending.

Instead, by starting with the debit card, your child can learn to manage his or her own money, understanding that it’s a good idea to only purchase what you can actually pay for. Once he or she has responsibly used a debit card for some time, it’s more likely that your child will use a credit card wisely when he or she is ready to take the plunge into the world of credit.