Debit and credit cards are two of the most commonly used payment methods today. Over 175 million Americans have a credit card, according to the Consumer Financial Protection Bureau’s 2021 Consumer Credit Card Market report. And according to a 2022 report from S&P Global Market Intelligence, debit card preference of consumers surpassed that of credit cards in 2022 for the first time.
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 children manage these cards in a way that maximizes their benefits and minimizes their risks.
But which is best? Both credit and debit cards have their upsides and potential pitfalls that will factor into a parent’s decision. Ultimately, the best choice is the one that helps the child develop financial independence.
What about cash?
Giving a child a credit or debit card may feel like setting your wallet on fire. However, there are good reasons to opt for plastic instead of cash. The number of cashless businesses is increasing around the world. Especially relevant to parents of kids and teens, entire school districts have gone cashless for sporting event tickets, concessions and other school-related activities.
One reason for this transition is safety. Paper money lacks protections that credit and debit cards have. A stolen wallet of cash is likely gone forever, but a lost or stolen card can be locked and replaced.
Plus, transacting exclusively in cash won’t allow children to learn how to protect sensitive financial information, an increasingly important skill as data breaches hit an all-time high in 2021, according to the Identity Theft Resource Center’s 2022 Annual Data Breach Report.
Credit cards for kids: Pros and cons
Credit and debit cards may look identical, but they work very differently: A credit card lets you borrow money from an issuer while a debit card pulls money from your bank account. This difference is at the root of several benefits and drawbacks of both types of cards.
A credit card is essentially a means of taking out a loan; as such, you must be 18 to get one. If your child is under 18, the only way for them to “get” a credit card is to add them as an authorized user to an existing account. An authorized user is allowed to use the card but isn’t responsible for paying the bill. However, some issuers have age restrictions for authorized users too, so check with your card issuer to see if your child is old enough to be added to your account.
Potential dangers of credit
Giving a minor unfettered access to your credit line can have serious financial consequences. That’s why Jessica Pelletier, Executive Director of FitMoney, a nonprofit that provides free financial literacy curriculums for K-12 schools, advises parents to “be very careful that there are firm limits … in place for an authorized user.” The child could rack up charges that increase your credit utilization ratio, and if you don’t pay off the balance, you’ll be charged interest. 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 its consumer cards. Absent that technology on your credit card, you could come up with a contract between you and your child that lays out the spending limit and consequences for exceeding it. You can also monitor your child’s spending by regularly logging in to your account, and by setting up alerts that notify you when purchases are made or when you’re close to maxing out your credit limit.
Credit’s positive impact
When used responsibly, though, kids can reap lasting benefits from a credit card. Unlike debit cards, credit card companies report to the three credit bureaus. Being an authorized user can build the child’s credit score in two ways. Many issuers report the user activity of authorized users in addition to the primary account holder’s. (Some issuers only report this information if the child is a certain age; ask the card issuer what their policy is.)
So if you’re sure as the parent that you will make on-time, in-full credit card payments, your child can “piggyback” off of that good credit history. Plus, 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 your oldest credit card account.
Helping your child build their credit score is an invaluable gift. A good credit score may help them secure a job, get lower interest rates on loans and, when the time comes, a top-notch credit card of their own.
Debit cards for kids: Pros and cons
For parents who want to teach their kids about paying with plastic, a debit card may seem like a more natural first step. A prepaid debit card is one alternative to sharing your own 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 may also have fees and generally lack mobile banking capabilities.
If you’re considering getting your child started with a traditional debit card, here are some factors to consider.
Downsides to debit
As with credit cards, overspending is a real possibility with a debit card. As such, Pelletier warns against giving a child a debit card that is directly connected to the parent’s checking account. A kid that hasn’t yet learned how to spend responsibly could go on a shopping spree, eating up money in the bank that was meant for bills and other expenses. Kid-specific debit cards may be a safer option. The child gets a debit card linked to a separate checking account, which is owned and managed by the parent. Parents can set spending limits and monitor their child’s spending habits. Many of these debit cards for kids also allow parents to assign chores through the accompanying app and deposit money once the chores are completed. Note, though, that some of these debit cards for kids charge monthly fees.
Debit cards also have inferior consumer protections compared with credit cards. If your debit card or card information is stolen and fraudulent charges are made, you may not be responsible for them — but that depends on when you report the loss. Credit cards cap losses at $50, regardless of when the cardholder reports fraudulent activity.
While debit cards can teach important money management lessons, they won’t have any impact on another long-term aspect of your child’s financial health. Debit card usage doesn’t get reported to the three major credit bureaus, so it won’t impact their credit score — no matter how responsibly your child uses the card.
Where debit shines
Accessibility is perhaps the biggest argument in favor of debit cards over credit cards. Some debit cards don’t 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 feel more tangible as purchases almost instantly reduce the available balance in a checking account whereas purchases on a credit card can be paid off later. The immediacy of debit card transactions may encourage kids to budget and be intentional with their spending. And because debit card purchases are made with money that already sits 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 to help children learn how to manage money. But they both come with inherent risks that parents should consider when deciding 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 the child’s hands, making parental guidance a necessity.
“I don’t want parents to think that they can get the child a card and now we don’t have to talk about it,” Pelletier says. “A card is great when it comes along with education and discussion.”
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Jae Bratton writes for NerdWallet. Email: [email protected].
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