Children’s credit or debit card: which is better?

Flow and credit card are two of the most commonly used payment methods today. More than 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, consumer preference for debit cards surpassed credit cards in 2022 for the first time.

As our world becomes increasingly cashless, it makes sense to teach our children 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 the best? Credit and debit cards have their potential pros and cons that will factor into a parent’s decision. Ultimately, the best choice is one that helps the child develop financial independence.

Giving a child a credit or debit card can 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 growing around the world. Particularly relevant to parents of children and teens, entire school districts have switched to cash for sporting event tickets, concessions, and other school-related activities.

One of the reasons for this transition is security. Paper money lacks protections like credit and debit cards. A wallet of stolen money is probably gone forever, but a lost or stolen card can be locked and replaced.

Plus, doing cash-only transactions won’t teach children how to protect sensitive financial information, an increasingly important skill as data breaches hit an all-time high in 2021, according to the 2022 annual report. on Identity Theft Resource Center data breaches.

Credit and debit cards may look the same, but they work very differently: a credit card lets you borrow money from an issuer, while a debit card takes money from your Bank account. This difference is the source of several advantages and disadvantages of the two 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 it as Authorized user to an existing account. An authorized user is authorized to use the card but is not responsible for paying the bill. However, some issuers also have age restrictions for authorized users, so check with your card issuer if your child is old enough to be added to your account.

Giving a minor unlimited access to your line of credit can have serious financial consequences. That’s why Jessica Pelletier, executive director of FitMoney, a nonprofit that offers free financial literacy programs for K-12 schools, advises parents to “be very careful that there are limits. farms… in place for an authorized user”. The child could accumulate expenses that increase your credit utilization rate, and if you do not pay the balance, you will be charged interest. A high credit utilization rate 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. Without this technology on your credit card, you could enter into a contract between you and your child that spells out the spending limit and the consequences for exceeding it. You can also monitor your child’s spending by regularly logging into your account and setting up alerts that notify you when purchases are made or when you are about to reach your maximum. Credit limit.

When used responsibly, however, children 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 establish a child’s credit score in two ways. Many issuers report the activity of authorized users in addition to that of the primary account holder. (Some issuers only report this information if the child is over a certain age; ask the card issuer what their policy is.) So if you as a parent are confident that you will make full payments and in time by credit card, your child can “build on” this good credit history. Additionally, an authorized user gets credit for the age of the account, regardless of when it was added to it. Since 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 rating can help them find jobs, get lower interest rates on loans, and when the time comes, a top credit card.

For parents who want to teach their kids to pay with plastic, a debit card might seem like a more natural first step. A prepaid debit card is an alternative to sharing your own debit card with your child. You can buy them virtually anywhere and parents can control the amount of money available to spend on the prepaid card. However, prepaid debit cards can also have fees and generally lack mobile banking features.

If you’re considering getting your child started with a traditional debit card, here are some things to consider.

As with credit cards, overspending is a real possibility with a debit card. As such, Pelletier cautions against giving a child a debit card directly linked to the parent’s checking account. A child who has not yet learned to spend responsibly might shop, eat money in the bank that was meant for bills and other expenses. Child-specific debit cards may be a safer option. The child receives a debit card linked to a separate current account, 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 tasks through the accompanying app and deposit money after tasks are completed. Note, however, that some of these child debit cards charge a monthly fee.

Debit cards also have lower consumers and buy protection compared to credit cards. If your debit card or card information is stolen and a fraudulent charge is made, you may not be responsible, but it 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 impact another long-term aspect of your child’s financial health. Debit card use isn’t reported to the three major credit bureaus, so it won’t affect their credit score, no matter how responsibly your child uses the card.

Accessibility is perhaps the biggest argument in favor of debit cards over credit cards. Some debit cards have no minimum age requirement 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, while purchases on a credit card can be refunded later. The immediacy of debit card transactions can encourage kids to budget and be intentional about their spending. And because debit card purchases are made with money that’s already in a checking account, you won’t have to worry about paying interest on unpaid balances.

“I don’t want the parents to think they can get a card for the child and now we don’t have to talk about it,” Pelletier says. “A map is great when it comes with education and discussion.”