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Credit or Debit: Which Is the Best Card for Kids?

This article discusses the pros and cons of introducing credit and debit cards to children and teenagers. It examines the safety concerns and benefits of cashless payment systems and highlights the advantages and potential pitfalls of both types of cards. Parents can use the information provided to teach their children responsible use of credit and debit cards while promoting their financial independence.

by Maria Laus

Questions Answered in this Article

  1. Why is teaching financial literacy to children important? Answer: Financial literacy can enable children to manage credit and debit cards efficiently, maximizing benefits and minimizing risks.
  2. Why are cashless payment systems becoming more popular in schools? Answer: Cashless payment systems in schools are becoming more popular because of safety concerns and the increasing prevalence of data breaches.
  3. What are the potential risks of giving a credit card to a child? Answer: Allowing a child unrestricted access to your credit line can result in financial consequences, such as a high credit utilization ratio and a lower credit score.
  4. How can credit cards have a positive impact on a child’s long-term financial health? Answer: When used responsibly, credit cards can help boost a child’s credit score, which can assist them in securing a job, obtaining lower interest rates on loans, and eventually getting their own credit card.
  5. What are the downsides to giving a child a debit card? Answer: Overspending and the lack of impact on a child’s credit score are potential downsides to giving a child a debit card. Additionally, debit cards offer a different level of consumer and purchase protection than credit cards.

Helping Kids Choose Between Credit and Debit Cards: Pros and Cons

Debit and credit cards are two of today’s most widely used payment methods. According to the 2021 Consumer Credit Card Market report from the Consumer Financial Protection Bureau, over 175 million Americans possess a credit card. In 2022, consumers’ preference for debit cards surpassed that of credit cards for the first time, as per a report by S&P Global Market Intelligence.

As our society increasingly relies on digital transactions, teaching our children how to use debit, credit, or both responsibly is crucial. Financial literacy can enable children to manage these cards efficiently, maximizing benefits and minimizing risks.

However, deciding which is better can be challenging, as both credit and debit cards have advantages and potential pitfalls that parents must consider. Ultimately, the best choice is one that promotes the child’s financial independence.

Cash vs. Plastic: Why Plastic May Be a Safer Option for Kids

While giving a child credit or debit card may seem daunting, there are valid reasons to choose plastic over Cash. The number of cashless businesses is on the rise worldwide. This is especially relevant to parents of children and teenagers, as entire school districts have shifted to cashless payment systems for sporting event tickets, concessions, and other school-related activities.

One reason for this shift is safety. Cash does not have the same safeguards as credit and debit cards. A wallet containing Cash that gets stolen is usually gone forever, whereas a lost or stolen card can be locked and replaced.

In addition, exclusively using Cash does not allow children to learn how to protect sensitive financial information. This is an increasingly critical skill as data breaches hit an all-time high in 2021, per the Identity Theft Resource Center’s 2022 Annual Data Breach Report.

Credit Cards for Kids: Potential Risks and Positive Impact

While credit and debit cards may appear similar, they function differently. A credit card lets you borrow money from the issuer, while a debit card draws funds from your bank account. This distinction gives rise to several benefits and drawbacks of both types of cards.

A credit card serves as a means of obtaining a loan; therefore, you must be 18 to get one. If your child is under 18, the only way for them to acquire a credit card is by being added as an authorized user to an existing account. Authorized users can use the card but are not responsible for paying the bill. However, some card issuers have age limits for authorized users, so check with your issuer to determine if your child is old enough to be added to your account.

Potential Risks of Credit and Its Positive Impact on Kids

Allowing minor unrestricted access to your credit line can have significant financial consequences. Therefore, it is crucial to set firm limits for authorized users. The child could accumulate charges that increase your credit utilization ratio, which will incur interest charges if you do not pay off the balance. A high credit utilization ratio and even one late payment can lower your credit score.

American Express is the only issuer that allows primary cardholders to set spending limits for authorized users on all its consumer cards. If your credit card does not have this technology, you can create a contract between you and your child that establishes a spending limit and consequences for exceeding it. You can also monitor your child’s spending by logging in to your account regularly and setting up alerts that notify you when purchases are made or when you are close to maxing out your credit limit.

Credit’s Positive Impact

However, when used responsibly, credit cards can offer long-term benefits for kids. Credit card companies report to the three credit bureaus, and being an authorized user can boost the child’s credit score in two ways. Many issuers report authorized user activity in addition to the primary account holder’s. Your child can “piggyback” off that good credit history if you consistently make on-time, in-full credit card payments. Additionally, an authorized user gets credit for the age of the account regardless of when they were added to it, which is beneficial since the length of credit history is a factor in credit scores.

Helping your child build their credit score is an invaluable gift that can assist them in securing a job, obtaining 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 to Consider

If you’re considering introducing your child to using plastic for payments, a debit card may be a more suitable option. Prepaid debit cards are a popular alternative to sharing your debit card, as they are widely available, and you can limit the amount of money to spend. However, prepaid debit cards may have fees and limitations, such as no mobile banking options.

Here are some pros and cons to consider if you’re thinking about getting your child a traditional debit card:

Downsides to Debit

Similar to credit cards, overspending can be a potential debit card issue. Executive Director of FitMoney, Jessica Pelletier, advises against giving a child a debit card directly connected to the parent’s checking account. A child who hasn’t yet learned to spend responsibly could quickly exhaust the funds for bills and other expenses. Opting for kid-specific debit cards could be a safer alternative, where parents can set spending limits, monitor their child’s spending, and even assign chores through the accompanying app. However, some of these debit cards for kids come with monthly fees.

It’s important to note that debit cards offer a different level of consumer and purchase protection than credit cards. In case of fraudulent charges, the responsibility of the loss depends on when the loss is reported, and credit cards cap the losses at $50 regardless of when the cardholder says fraudulent activity.

While debit cards can be beneficial in teaching money management skills, they don’t impact a child’s long-term financial health regarding their credit score, as debit card usage isn’t reported to the three major credit bureaus.

What’s Good About Debit?

Debit cards have the advantage of being more accessible than credit cards, as some debit cards have no minimum age requirement, making them a viable option for younger children. Additionally, debit card transactions have a more immediate impact on available funds in a checking account, which can encourage budgeting and responsible spending habits. Furthermore, since debit card purchases are made with public funds, there is no need to worry about accruing interest on unpaid balances.

However, as with credit cards, overspending is a risk that parents must be aware of when giving their child a debit card. To minimize this risk, it is recommended to use a kid-specific debit card that is linked to a separate checking account, allowing parents to set spending limits and monitor their child’s spending habits.

Another downside to debit cards is that they offer inferior consumer and purchase protections compared to credit cards. Suppose a debit card or card information is stolen and fraudulent charges are made. In that case, the cardholder may not be fully protected from liability, unlike with credit cards, where liability is limited to a maximum of $50.

It is important to remember that while credit and debit cards can be valuable tools for teaching children about money management, they come with inherent risks. Therefore, parental guidance and education should always accompany the privilege of having a credit or debit card.

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