Credit Card vs. Debit Card: Which is Better for Your Teen?
Using a payment card responsibly is an important life skill for teenagers. But, it can be difficult to decide whether to use a debit card or a credit card to teach this skill to your teen.
Some families add their children as authorized users to their credit cards, while others open up a bank account and attach a debit card to it. What makes sense for your family depends on several factors.
If you’re aiming to build your child’s credit history, then a credit card will be the more attractive choice. If you're looking to teach them the principle that money is finite, then a debit card may be the better option.
If you're not sure which way to go, read on…
Signs It's Time to Choose
There’s no specific age a child is ready to use a credit or debit card, but there are signs that begin to crop up.
The big one is a need. As kids get older, they want to have control over purchases that involve them. Running to the store alone to pick up summer clothes for your child is no longer an option. Nor is grabbing their sports equipment and school supplies. They are also more independent and will begin to ask for money for meals, transportation, and activities that don’t involve you. Scrambling to find cash to bankroll these activities regularly can get old quickly, hastening their need for a debit or credit card.
How responsible your child is should also dictate your decision. If your kid is trustworthy, giving them a credit card or debit card shouldn’t be an issue. But, if there’s a risk that he or she will drain the bank account or max out the credit card, you may want to wait.
Teaching Them Financial Responsibility
Credit and debit cards play important roles in people’s financial lives. They make purchasing things convenient and secure. They bring protections to consumers, and if used correctly, they build a credit profile that will help them secure low-cost loans. Both payment methods teach kids how to handle money responsibly, though in different ways.
With a debit card, teenagers see the money declining each time they make a purchase. Debit cards are useful tools for helping kids visualize how much items cost and understand that when they run out, that’s it. They can be a great way to teach that there are consequences for their choices. Do they really want to spend their last $5 on a Slurpee? Such small decisions will morph into more significant decisions as they get older.
Credit cards aren’t as clear-cut as a debit card when it comes to teaching a life lesson. With a credit card, the teenager doesn’t see the account dwindling. As a result, they don’t have a tangible way to know when they’re overspending.
That’s not to say that a credit card can’t be used to teach. To prevent any overspending, parents can set a low credit card limit, monitor the spending regularly and discuss the choices they made with the credit card at the end of the billing period. It presents an opportunity to open up a dialogue about spending and to offer tips on how to use credit responsibly. This discussion can be a valuable lesson that prevents a cycle of debt when children become adults.
Both credit and debit card can be teaching tools. In the beginning, determining which one is right for your child will depend on your child’s temperament. If he or she is prudent, a credit card may be most beneficial. But if they are a spendthrift, stick with the debit card at first.
Build Their Credit History With a Credit Card
Credit cards aren’t inherently evil. But, the way people use a credit card is what gets them in trouble. Credit cards are necessary to build a credit history. That credit history will be used to extend credit during different stages of life — from buying a car to consolidating student loan debt. Without a credit score, they won’t be eligible for most mortgages, and they can’t take out low-cost personal loans. Sure, fintech companies are emerging that use different criteria to assess a person’s creditworthiness, but the credit score is still the preferred method for most lenders.
If you're focused on helping your child develop a credit history, then a credit card is your only choice. Debit cards are backed up by the cash in your account, so they don’t get reported to the credit scoring companies — TransUnion, Equifax, and Experian. There’s no record of your transactions and your balances with debit cards, but there is with credit cards.
To build a credit history, your child has to use the credit card regularly and responsibly. That means making sure your child pays the bill on time and in full. Credit scores are largely based on the ability to borrow money and pay it back. The better job you do at that, the higher your credit score will be.
It's also a good idea to treat the credit card as a debit card. That means ensuring your child has enough money in the bank account to pay off the purchase he or she charged. If you teach your child to keep spending within their means, it will encourage a healthy relationship with debt. The last thing you want your child to think is that you can charge on a whim and worry about it later.
Credit Cards Provide More Security
Financial scams have been around forever, but losing a credit card is safer than losing a debit card. If a hacker gets a hold of your credit card number and goes on a shopping spree, the credit card issuer is on the hook. They are lending you the money, so they bear the risk. With a debit card, your money is being siphoned, which makes it more difficult to get back.
In other words, if a fraudulent transaction transpires with a credit card, your money remains intact. With a debit card, the money disappears as soon as the transaction happens.
Credit Cards Usually Cost More Than Debit Cards
Credit cards enable you to make purchases when you don’t have the cash, but that privilege comes at a cost: interest. Credit cards charge you if you carry a balance each month, which can get costly if the balance carries over from month to month.
There are also fees associated with credit cards that make it a more expensive way to make purchases. Debit cards don’t charge you any interest, but they can charge you overdraft fees. Those fees can quickly add up if you aren’t careful. The best way to avoid fees with a credit card is to pay the entire balance each month. For debit cards, make sure your teens spend less than what's in their account.
It's a Wash When It Comes to Convenience
Thanks to the Internet and mobile apps, opening a credit card or debit card for your teenager is easy to do. So is tracking their spending, setting limits, and getting alerts when they overspend.
Opening a teen bank account to use a debit card requires an additional step, but that too can be painless in the digital era. So, if convenience is what you are after, it's a wash.
Debt is a necessary part of life. And it can be a healthy or unhealthy relationship depending on how you're taught to handle money. That's why it is important to use credit and debit cards as a teaching tool for your children while they are young.
Either tool can be a powerful way to learn how to handle money responsibly, granted you practice what you preach. Some of the best lessons they will learn in life will come from seeing how their parents behave — and that couldn't be truer with personal finance.
Does your teen currently use a credit or debit card? How are you training them to be financially responsible?
Mary Brown is an educator and freelance writer. She has over 20 years of experience teaching people of all ages how to manage their finances, as well as more than 10 years of experience as a writer. She lives and works in Boston.
All content provided in this blog is supplied by Mary Brown and is for informational purposes only. Barclaycard makes no representations as to the accuracy or completeness of any information contained in the blog or found by following any link within this blog.