A Guide to Credit Cards, Debit Cards and Gift Cards For You and Your Child

All About the Plastic

Updated April 4, 2023

From a child’s perspective, those small plastic cards that line Mom’s wallet must be some kind of sorcery.  You load up a grocery cart, and the store lets you leave with all your loot after just the littlest tap of that magic card on a reader.  It almost makes the apples, oatmeal and ice cream feel free for the taking. 

From the grocery store to the doctor’s office, we leave an invisible trail of payments behind us that must seem downright mystical to our kids.  Let’s not wait for those credit card applications to reach them as preteens before we broach the important topic of credit.  And as always, our advice is to do it on the fly.  As you pay, talk to your child about how you are using your credit card.  Let your kids be privy to the payments you make on a daily basis, and over time, this will build your child’s financial literacy skills when it comes to credit cards.

Debit Cards, Credit Cards & Gift Cards…And How To Explain Them to Your Child

Debit Cards

When it comes to plastic, let’s start from the top with the most simple card for little money mavens to master.  Do kids see you swipe your debit card at the grocery store, or withdraw money at the ATM? A two-minute conversation can let them know what it’s all about. 

A debit card allows you to take money directly out of your bank account. For example, when you use your debit card at the gas station, the $18.90 you owe for gas zips right from your bank account into the gas station account. In short, debit cards let you instantly transfer your own funds to the store where you are purchasing something.

Why not just hand over cash? Counting out bills and coins and waiting for change takes time. Debit cards are a quick and easy way to pay for the things you need and want. They also allow you to take cash out of your bank account when you need it.

People insert debit cards directly into an ATM (automated teller machine), type in their secret code, and withdraw cash straight from their bank to use around town.

Credit Cards

Credit cards look a lot like debit cards, but they are actually very different.  A credit card is a card that allows you to borrow money to purchase things you need and want.  First, you have to apply to companies like Visa, Mastercard or American Express to get approval to have a credit card.  Applicants typically have to give information to prove your income (how much money you make), employer (where you work), assets (how much money you already have), etc.  Once approved, the company will send you your own credit card to use. 

If we go back to the gas station, we can see how credit cards operate quite differently from debit cards.  If you pay for $18.90 of gas with a credit card, you’re actually borrowing money from the credit card company to pay for your gas.  (In short, you’re buying now, but agreeing to pay later!)  At the end of the month, you must pay back the credit card company for your gas, as well as any other charges you have made on the card (this might include anything from a bag of chips to a vacation).  More on borrowing and paying back here. 

If you don’t have enough money to pay the whole credit card bill, the company will charge interest (an additional amount), which makes your purchases even more expensive.  When people consistently spend more money on their credit card than they are able to pay back, they go into credit card debt and over time their bills continue to add up.  Given that the average U.S. household carries over $16,000 in credit card debt 😱, it’s time to break the cycle.  We need to teach our kids that when it comes to credit cards, if you can’t afford it now, don’t use your credit card to buy it. 

In addition to lending cardholders money, credit cards also offer people perks to their spending.  Some cards allow customers to redeem their spending dollars for free plane flights, hotel rooms or even cash back.  Additionally, credit card companies often protect your purchases if something goes wrong.  Or, if someone steals your credit card number and makes purchases without your consent, the company will often refund the charges and send you a new card to protect you in the future.   

Older kids might be able to take a deeper dive into the nuances of credit cards.  If you are applying for a new credit card, loop them in.  Show your kiddo how you compare credit card companies by evaluating annual fees, considering spending limits, closely examining interest rates and weighing spending rewards.  The sooner kids build these important skills, the better off they will be when they fly the coop.

Gift Cards

Unlike debit or credit cards, gift cards are pre-loaded with a certain amount of money to be used only at one particular store.  People often give gift cards when they want the recipient to be able to pick out whatever they’d like from a specific retailer. 

Gift cards can be used over and over again at the designated store until there is no more money left on the card.  (An important exception: companies like AMEX and VISA also offer gift cards that can actually be used at almost any retailer.) 

Unfortunately, if a gift card is lost, the money is usually lost along with it.  The BT Moms recommend stashing your gift cards in the SAVE section of your Benji Bank for safekeeping!

Benji’s Bottom Line

Our kids see us swipe plastic every day, so it’s high time they know what’s going on.  Instead of sitting them down for a lecture on the various types of cards out there (cue serious eye rolling), use everyday moments to narrate your spending: “I’m using my credit card to buy these new sneakers for $56.  At the end of the month, I’ll have to pay the credit card company back for them.  If I’m late on my payment, they’ll actually charge me $64 instead.” 

In short, any of these tiny little teaching moments accrue over time and ultimately ensure that our kids have the financial wherewithal to make smart choices, when and where it counts.  If kids understand that debit cards use our own cash directly from our own bank accounts, credit cards use money we have to pay back later, and gift cards are pre-loaded with a certain amount to spend, then they already have a jump start on financial literacy.

Given the choice between using a debit card or a credit card, which do you think is the better option?  Why?

(Hint: There is no right answer...there are positives and negatives to both!)