Credit cards and debit are the two most popular payment options today. According to the 2021 Consumer Credit Card Market report of the Consumer Financial Protection Bureau, over 175 million Americans own a credit card. According to S&P Global Market Intelligence’s 2022 report, debit cards were preferred by consumers more than credit cards in 2022.
It is important to teach children how to use credit responsibly, debit and credit, as the world becomes more cashless. Children can learn financial literacy to manage their cards so that they reap the benefits and minimize their risks.
Which is better? Each credit and debit card has its advantages and pitfalls. This will impact the decision of a parent. The best choice for the child is one that allows them to become financially independent.
How about cash?
It may seem like you are setting your wallet ablaze by giving a child a debit or credit card. There are many reasons to choose plastic over cash. Around the globe, there are more cashless businesses. Particularly relevant for parents of teens and children, whole school districts have stopped using cash to pay for tickets, concessions, and other school-related expenses.
Safety is one reason this transition has taken place. Safety is a key reason that paper money does not have the same protections as credit and debit cards. While a stolen cash wallet is most likely lost forever, a lost or stolen credit card can be secured and replaced.
Furthermore, children cannot transact in cash and learn how to protect financial information. This is a critical skill since data breaches are on the rise according to the Identity Theft Resource Center’s 2022 Annual Data Breach Report.
Kids credit cards: The pros and cons
Although credit and debit cards look the same, they function very differently. A debit card allows you to withdraw money from your bank account while a credit card allows you to borrow money from an issuer. This is the reason for many of the drawbacks and benefits of both types.
Credit cards are essentially a way to take out a loan. You must be 18 years old to obtain one. Your child under 18 years old can only “get” credit cards by adding them as authorized users to existing accounts. The card can only be used by an authorized user. However, they are not responsible for the payment of the bill. Some issuers also have age restrictions. Check with your card issuer to find out if your child can be added to your account.
Credit Possible dangers
It can lead to serious financial consequences if you allow a minor access to your credit lines. Jessica Pelletier is the Executive Director of FitMoney. A nonprofit that offers financial literacy curriculums to K-12 schools, FitMoney warns parents that allowing minors unrestricted access to your credit line can have serious financial consequences. Your credit score can be affected by a high credit utilization ratio or a single late payment.
Only American Express allows primary cardholders the ability to set spending limits for all its consumer cards. You could create a contract between your child and you that sets the spending limit and penalties for any violations. Monitor your child’s spending habits by regularly logging into your account and setting up alerts to notify you of purchases or close to reaching your credit limit.
Credit’s positive effect
Credit cards can be a great tool for kids if they are used responsibly. Credit card companies report to all three credit bureaus, which is different from debit cards. Two ways to build a child’s credit score are being an authorized user. Many issuers report authorized user activity in addition to primary account holder. Some issuers report information only if the child is under a certain age. Ask the card issuer about their policy. If you are sure that your child will pay on time and in full credit card payments, you can “piggyback”. An authorized user can get credit regardless of their age. Credit scores are affected by credit history. It may be a good idea to add your child’s name to the oldest credit card account.
It is a great gift to help your child improve their credit score. Good credit scores can help your child get a job, lower interest rates on loans, and, when it is time, a high-quality credit card.
Kids’ Debit Cards: The Pros and Cons
A debit card is a great way to start teaching your children how to pay with plastic. Prepaid debit cards are an alternative to having your own debit card. They can be purchased almost anywhere and the parents have control over how much money they can spend on them. Prepaid debit cards can be subject to fees and may not have mobile banking capabilities.
Here are some things to think about when you consider getting your child started using a debit card.
Overspending with a debit card is possible, just like with credit cards. Pelletier cautions against giving a child any debit card that is connected directly to a parent’s checking account. If a child isn’t yet able to manage their spending responsibly, he or she could shop and spend money that wasn’t intended for bills. A child-specific debit card may be safer. The parent can link the child’s debit card to a separate checking account. This is managed and owned by the parent. Parents can limit spending and monitor their child’s spending habits. Many debit cards for children allow parents to assign chores and deposit money after the chores have been completed. Some debit cards for children have monthly fees.
Also, debit cards have lower consumer and purchase protections than credit cards. You may not be held responsible if your debit card or card information is stolen. However, it all depends on when the loss was reported. No matter when fraudulent activity is reported, credit cards have a $50 loss cap.
Although debit cards may teach valuable money management skills, they will not have any effect on the long-term financial health of your child. The three major credit bureaus don’t report debit card usage, so your child’s credit score won’t be affected by it.
Where debit shines
The biggest argument for debit cards is accessibility. Some debit cards do not have minimum age requirements and may be the only option for a child who is very young.
A debit card is more tangible than a check account. Purchases on a card are able to be paid later, but they can reduce your available balance almost immediately. Children may be encouraged to spend more responsibly and budget because debit card transactions are immediate. You won’t be charged interest on any unpaid balances because debit card purchases are made using money already in your checking account.
Debit and credit cards are great tools for helping children manage their money. Parents should be aware of the inherent risks associated with both credit and debit cards when deciding whether their child is ready to have a card. These risks are even greater once the card is in the hands of the child, so parental guidance is essential.
Pelletier states that parents shouldn’t think they can give their child a card, and then we don’t need to talk about it anymore. A card is great when it’s accompanied by education and discussion span>