As parents, you know the difference between all the cards in your wallet. When you make a purchase, you likely do not even have to think about whether you’re using a debit card, credit card, a gift card, or paper money. But for young kids, it is far from second nature.
Because people use cash less often these days, it’s even more important to start teaching lessons about spending early. Understanding the differences between debit and credit and other ways consumers spend in our economy is important for your children so they can make future decisions about managing their finances. (To keep this simple, we won’t get into spending with digital wallet apps like Venmo, Cash App, etc.).
Adults can teach simple concepts early, so kids will be armed with information when it comes time to exercise their own spending power. Where do you start with kids? Provide a basic overview of some of the options and how they work.
So Many Ways to Spend Money
The truth is debit cards, credit cards, and even gift cards can look very similar to a child, but there’s a big difference.
Keep it simple when talking to your kids. Debit cards can be used to purchase goods and services with money that is currently available in a checking account. Using a credit card means you are borrowing funds from a lender, which may come with interest charges. Gift cards – ubiquitous in today’s economy – should be treated like money and kids should understand their value.
How to Teach Kids Financial Literacy
The good news is there are real-world methods for teaching children about money.
In their early years, talk to kids about how money works. Try to use real money occasionally so they see currency changing hands. You might help the kids run a lemonade stand or bake sale so they have broader experience with money.
Next, you can help them manage gift cards they receive from family and friends. Teach your kids how to keep track of gift card balances and how to check in with customer service to verify a remaining balance.
Some gift cards are re-loadable. Remember this and have kids use gift cards when they are shopping for presents for friends and family members or filling up the family car with gas for their travels.
Some caregivers supply their kids with their own credit card with the adult as an authorized user. This way, you can budget for them while they learn the ins and outs of using credit. It may give them a sense of independence while you still retain a sense of control. Think of this as a new approach to allowance.
Another helpful way to teach teenagers when to use debit over credit is by arming them with knowledge. When making big purchases, explain that the biggest difference between debit and credit is in the cost. Purchases made with a debit card come directly from the user’s checking account and have no interest charges. However, if a purchase is made with credit, interest will accrue unless the balance is paid in full each month.
Credit cards are one of the most expensive ways to make purchases if not paid off each month. Keep in mind that interest charges are based on the balance. The higher the balance, the higher the interest.
The good news is that you are not alone and there are resources to help you address this topic. For example, banzai.org is a helpful financial literacy resource which provides tips and tricks for teaching your kids about finances like using credit cards wisely, managing money while going to college, or how to save money for a large purchase. This resource includes topics for beginners as well as topics for adults.
No matter how it happens, it’s important to teach children the difference between debit and credit and other ways consumers spend so young people can make wise financial decisions in the future. There are many age-appropriate ways to explain this concept. With clear communication and transparency, you can empower your kids to make the right choices when spending.