Living in a digital age often means that children see parents swiping plastic for purchase more than they see the using cash. They watch you pay for items with your card. However, do they understand how it truly works?
Part of teaching our children about finances includes credit and debit. Kids need to understand the difference and how the concept truly works. You know there is a difference between debit and credit. It is also smart to make sure they learn about each one and how using it will affect their own finances.
WHAT IS THE RIGHT AGE TO START THE DISCUSSION?
There is not really a “right” age to start educating your kids on this topic. However, it is very important that you do so when your kids are old enough to have their own checking account. Many kids will get one by the time they are 12 or 13. You may want to even hold onto the debit card until you have the chance to teach them about how it works (just avoid possible issues).
Of course, it doesn’t hurt to start sharing with your kids how you use the card at the store and how that money comes out of your account. Even young children can start to learn about this. My oldest is 11 and we have been having casual conversations about debit cards for a couple of years now.
You know your kids and how mature they are. If you feel that they are ready at age 10, then start the discussion. However, for other parents, the child will need to be a bit older before those talks commence.
WHAT TO KNOW ABOUT DEBIT
What kids need to know about debit is that it takes the money instantly. They need to know using a debit card means that the money will instantly be deducted from their checking account. Itt means that they have to know exactly how much money they have in the bank before they shop.
They know this by learning how to maintain and balance a checking account. They should also learn how to monitor their accounts online (just to watch for fraud).
In addition, they should understand that if they use the card at an ATM to get cash. They should understand that cash it also deducted from their account balance in the same manner. As great as it would be for cash to magically appear when you hit your ATM, we all know that is not the case. Kids need to understand this as well.
WHAT TO KNOW ABOUT CREDIT CARDS
The most important thing kids need to know about credit is the difference between credit and debit. Instead of the money coming directly from your account as it does with a debit purchase, credit purchases will be shown on bill at the end of the month.
Even more important than knowing how a credit card work is learning how to use credit card responsibly. Kids have to understand that a credit card is not a golden ticket to just shop and buy anything they want. They have to realize that it is a temporary loan. Here are some things to remember to teach your kids about credit:
- Credit cards are not free money. They are only delaying the payment.
- Never charge anything you can not afford to pay back right now. Help your kids learn that they should never charge anything greater than what they have in the bank at this moment. They should not charge anything with the expectation of future income.
- When you do not pay them off, you will actually pay more money. Try a practical thought with this. Use an example of something such as $2 for a bag of candy. Ask them if they would rather pay $2 for the candy now or hold onto their money and then pay $4 for the candy in a few months. This can be a great way to help them understand why they need to never make just minimum payments, but always pay it in full.
- Credit cards can increase your credit score. Kids need to know that a credit score is how a bank will know if you are good with money. They will need a score if they ever plan to take out a vehicle loan or a home mortgage. By using credit cards the right way, you are proving you are good with your money.
IDEA ON HOW TO TEACH YOUR KIDS
There are some different ways to go about educating your children about credit and debit cards. The simplest thing to do is to take them with you when you shop.
Allow them to see how you add the items you need to the cart. Then, swipe your debit card. When you get home, go online to your checking account and show your child how the amount that they spent is already deducted from your account.
When you need to make a credit card purchase, do the same thing. Have your child with you and swipe your credit card. Explain to them that it is a temporary loan. Then, when the bill comes at the end of the month, show them the purchase that they made with you on the statement. Share with them how you are paying it in full as to not carry a balance.
PRACTICE AT HOME
Of course, you would not want to hand a 12 year old a debit or credit card, but you can create your own! Find one of your old cards and create a new “cover” for it. Turn this into your child’s own debit card.
Then, when it comes allowance time, give them the cash as usual. However, also have them create a check register, where they can record the deposit. Paperclip the cash to the register.
When they want something, have them hand you the debit card to pay for it. Buy what they need for them. When you get home, have them get out the register and the cash. They will record the transaction and show the new balance. Make them instantly hand you the total they spent at the store This allows them to see how it truly works. They will see that they were able to use plastic to get what they needed – but they had to pay for it instantly.
You can do the same thing with a credit card. However, instead of asking them to hand over the cash at that time, have them (and you) keep a running total of what they are spending for the month. They should make sure they watch their account so that they do not overspend more than the amount they have in their account.
At the end of the month, hand them a bill for what they owe. They will need to go to their cash account and then hand over the full amount due at that time. This helps them understand how they can use it to get things they need. The difference they will see is that they pay you once a month instead of it being instant — but that they are still needing to track their spending so they don’t spend more than they have available!
REAL LIFE EXPERIENCE
Once your child has a grasp of how to use debit or credit, you can have them get a gift card to start (watch pre-paid cards as they often have fees attached to them, and you don’t want to use that type of card). Help them learn how to load a balance onto the card and then start to use and track their spending. This will help them get use to swiping and entering a PIN (as needed) before they have an actual debit card attached to the checking account.
You take the time to teach your kids how to do laundry, about the birds and the bees and how to be a good person. Make sure that you don’t forget the importance of finances too! It is just as important as other topics. Read more — 11 Financial Lessons All Kids Need to Learn.