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Teaching kids the difference between credit and debit

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While your kids may watch your spending habits, they may not understand how you are paying for purchases at places like the grocery store, the gas station, or on Amazon. Debit cards and credit cards look similar but work in different ways. They also provide different levels of protection for consumers.

Americans use debit cards more than credit cards, but credit cards more than cash, according to a 2020 survey. About 23 of the average 60 payments per month are done with debit cards, 18 with credit. As for overspending, people between 40 and 75 are far more likely to carry debt than someone under 25.

Knowing the difference between credit and debit cards is a fundamental component of financial literacy, and something your child or teenager should understand. Here’s a look at the differences between these two forms of payment, and what you should teach your kids about both.

The difference between debit cards and credit cards

One of the biggest differences between debit cards and credit cards is how payment is handled. With a debit card, funds are withdrawn immediately from your bank account when you make a purchase.

A debit card is a bank card linked to a bank account, typically a checking account. Your bank issues you a debit card to use for transactions in person, online and through ATMs. When you use a debit card, money is withdrawn directly from your linked account.

Credit cards, on the other hand, are issued by credit card companies and other financial institutions. Essentially, a credit card is a type of loan. When using a credit card, you are borrowing money from the credit card company under the premise that you will pay it back eventually. Unlike purchases with a debit card, charges on a credit card will also be reported to the credit bureaus, which means they will help your child build credit.

Interest and fees

Most credit card issuers charge interest if you do not pay your card balance in full by a specified due date. You can also accumulate late fees if you fail to make at least the minimum payment by the card’s due date. Some credit cards offer an introductory zero-interest period, where no interest is charged as long as you pay the balance by the period ending date.

Many credit cards also allow you to withdraw money or take a cash advance at an ATM, but the ATM owner may charge a fee for using your credit card to withdraw funds. With a Mastercard, for example, you can withdraw money or take a cash advance from an ATM using a PIN. The fee charged by the ATM owner is disclosed prior to the completion of the transaction.

A debit card, on the other hand, has no fees as long as it’s connected to a fee-free checking account.

Overdraft protection

If you don’t have enough funds available to cover a purchase, your debit card could either get declined or your bank covers the transaction and charges you overdraft fees. Most banks allow you to opt-in to overdraft protection, but often at an extra cost. You can use credit cards to pay for transactions even if you don’t have the necessary funds available. However, you could end up paying interest and late fees if you fail to make payments on the balance.

Fraud protection

Another difference between the two payment cards is consumer fraud protection. Credit cards are typically considered a safer option because of the extra protections they provide cardholders. With credit cards, your liability on unauthorized purchases is limited to a maximum of $50 if your credit card is lost or stolen.

Many credit cards now carry a zero liability policy, further limiting your responsibility for unauthorized purchases. Some credit cards come with additional consumer protections, such as extended warranty protection and new purchase protection.

Debit cards also protect against unauthorized purchases, but not to the same extent as credit cards. With debit cards, your maximum liability is $50 as long as you notify your bank within two business days of discovery of the unauthorized transaction. Notification after two days could lead to a liability of up to $500 or more, depending on your situation.

Should I give my child a credit or debit card?

Your child’s age will determine which card they are eligible to receive and use. Typically, they will have to be at least 18 years old to apply for their first credit card. Credit card applicants are generally subject to a credit check to determine creditworthiness. It’s more up to you to figure out when to give them their first debit card.

Individuals under 21 may also need to prove they make enough income to cover credit card payments. Teens younger than 18 can sometimes gain access to a credit card earlier by being added as an authorized user to a parent’s credit card account. The minimum age for an authorized user depends on the card issuer.

Many banks and credit unions offer specific bank accounts for teens and children. In most cases, the account must be opened jointly with a parent or guardian who acts as a custodian until you reach the age of majority for your state.

Beyond age, choosing the right first card to use depends on your child’s needs as well as whether they want to pay for a transaction now or later. Some credit cards allow you to earn rewards for making purchases, which you can often redeem for cash back, free travel, and more. However, there’s a risk of overspending with credit cards. It’s easy to fall into the trap of thinking you’ll have money to pay for purchases later, only to get behind and fall into credit card debt.

If you’re worried your child may overspend and want to limit spending, a debit card probably makes sense for most purchases. Since debit card purchases are tied to the balance in a bank account balance, there’s some automatic control over spending. It may also be easier to track debit card purchases than credit card purchases. Keep in mind that debit card purchases don’t carry the same protections as credit cards, and they won’t help your child build credit.

You may want to offer the option of adding your child as an authorized user on your credit card. You could also discuss the option of that versus a secured credit card or a prepaid debit card.

The bottom line

Debit cards and credit cards are excellent tools for consumers when used responsibly. Help your children track and understand their spending habits and limits to determine the best card or cards for them. Regardless of which card your child ends up using, help your child protect themselves by taking measures to secure their card and personal information.

Written by
Kevin Payne
Travel Rewards Expert Contributor
Kevin Payne is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. He is also the personal finance expert behind Family Money Adventure, where he regularly shares practical advice on managing family finances and traveling with a family.
Edited by
Senior Editor