Teach Your Child the Difference Between Credit vs. Debit

Financial Literacy For Kids: Debit Cards and Credit Cards

Updated March 27, 2023

People Spend Money on Gifts

During special times of the year (a holiday, a graduation, a birthday,… ) people spend money on gifts. Let’s take Valentine’s Day. History shows that Americans spend billions on their loved ones, and we get it...we are suckers for overpriced chocolates, too. Let’s take a look at how these love-inducing expenditures are paid for.

How Do They Pay For It: Cash, Credit, Debit?

It’s safe to say, most purchases are likely being bought with plastic instead of cash. These days, we are card-heavy and cash-starved. In fact, just 10% of Americans use only cash to make their daily purchases. If it’s all about the plastic, it’s even more important that our kids get a grip on those little cards that dominate our spending habits.

What Do Those Plastic Cards Mean To a Child?

From a child’s perspective, those small plastic cards that line Mom’s wallet must be some kind of sorcery. From the grocery store, to the coffee shop, 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 this important topic. And as always, our advice is to do it on the fly. As you pay, narrate. Let your kids be privy to the payments you make on a daily basis, and over time, you’ll take the mystery out of money for your littles.

When it comes to plastic, let’s start from the top with the most simple cards for little money mavens to master. We can use an every day money moment (perhaps purchasing Paw Patrol valentines at the local Target?) to teach our littles all about the plastic.

How to Explain Debit Cards and Credit Cards To Your Child

Debit Cards

“When I pay for these Paw Patrol valentines with my debit card, the money will zip right from our bank account and go directly to Target’s account.”

Kids should know that debit cards let you instantly transfer your own funds to the store where you are purchasing something. Debit cards also allow you to take cash out of your bank account when you need it. You can insert debit cards directly into an ATM (automated teller machine), type in your secret code, and withdraw cash straight from your bank to use around town.

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.

Credit Cards

“When I buy these Paw Patrol valentines, I’m borrowing money from my credit card company that I will have to pay back later.”

Kids can understand that even though credit cards look just like debit cards, they actually operate quite differently. Credit cards allow you to borrow money to purchase things you need and want. 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 valentines, as well as any other charges you have made on the card (this might include anything from a bag of chips to a Disney vacation!).

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 $6,569 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 swipe to buy it.

The Takeaway

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 🙄, let’s use everyday moments to narrate our spending. Though that post-chocolate sugar high will eventually fade, your cash register convo may actually stick.

“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!)