(NerdWallet) – Debit and credit cards are the two most commonly used payment methods today. More than 175 million Americans have credit cards, according to the Bureau of Consumer Financial Protection’s 2021 Consumer Credit Card Market report. And according to a 2022 report from S&P Global Market Intelligence, consumer debit card preferences surpass credit cards in 2022 for the first time.
As our world becomes increasingly cashless, it makes sense to teach our children how to use debit, credit responsibly — or both. Financial literacy can help children manage these cards in a way that maximizes their benefits and minimizes their risks.
But which one is the best? Both credit and debit cards have potential advantages and disadvantages that will factor into a parent’s decision. In the end, the best choice is one that helps the child develop financial independence.
” SEE: 11 things to know before getting your first credit card
How about cash?
Giving a child a credit or debit card may feel like burning your wallet. However, there are good reasons to choose plastic over cash. The number of cashless businesses is increasing worldwide. Especially relevant to parents of children and youth, entire school districts have used cash for tickets to sporting events, concessions, and other school-related activities.
One of the reasons for this transition is security. Paper money doesn’t have the protection that credit and debit cards have. A stolen cash wallet is likely to be lost forever, but lost or stolen cards can be locked and replaced.
Plus, transacting exclusively with cash won’t allow children to learn how to protect sensitive financial information, a skill that’s become increasingly important as data breaches hit an all-time high in 2021, according to the Identity Theft Center’s 2022 Annual Data Breach Report.
” AGAIN: Credit card vs. debit: Which is safer online?
Credit cards for kids: Pros and cons
Credit and debit cards may look identical, but they work very differently: A credit card lets you borrow money from an issuer while a debit card draws money from your bank account. This difference is the root of some of the advantages and disadvantages of the two types of cards.
Credit cards are basically a means of taking loans; therefore, you must be 18 years old to get one. If your child is under 18, the only way for them to “get” a credit card is to add them as an authorized user to an existing account. Authorized users are allowed to use the card but are not responsible for paying bills. However, some issuers also have age restrictions for authorized users, so check with your card issuer to see if your child is old enough to be added to your account.
Potential credit hazard
Giving even a little unrestricted access to your credit line can have serious financial consequences. That’s why Jessica Pelletier, Executive Director of FitMoney, a non-profit organization that provides free financial literacy curricula for K-12 schools, advises parents to “be aware there are strict limits… for authorized users.” The child can charge fees that increase your credit usage ratio, and if you don’t pay off the balance, you will be charged interest. A high credit utilization ratio and just one late payment can lower your credit score.
Only American Express allows primary cardholders to set spending limits for authorized users on all of its consumer cards. Without technology on your credit card, you can create a contract between you and your child that lays out a spending limit and consequences for exceeding it. You can also keep track of your child’s spending by logging into your account regularly, and by setting up alerts that let you know when purchases are made or when you’re close to reaching your maximum credit limit.
The positive impact of credit
However, if used responsibly, children can reap long-term benefits from credit cards. Unlike debit cards, credit card companies report to three credit bureaus. Becoming an authorized user can build a child’s credit score in two ways. Many publishers report user activity from authorized users other than the primary account holder. (Some issuers only report this information if the child is a certain age; ask the card issuer what their policy is.) So if you’re confident as a parent that you’ll make your full credit card payment on time, you child can “piggyback” on that credit history. It is good. Plus, authorized users get credit for account age regardless of when they were added. Since a long credit history is a factor in credit scores, it’s a good idea to add your child to your oldest credit card account.
Helping your child build their credit score is a priceless gift. A good credit score can help them secure a job, get lower interest rates on loans, and when the time comes, their own best credit card.
” STUDY: How old are you to get a credit card?
Debit cards for kids: Pros and cons
For parents looking to teach their kids about paying with plastic, a debit card might seem like a more natural first step. A prepaid debit card is an alternative to sharing your own debit card with your child. You can buy them practically anywhere, and parents can control how much money is available to spend on prepaid cards. However, prepaid debit cards may also incur a fee and generally do not have mobile banking capabilities.
If you’re considering starting using a traditional debit card for your child, here are some factors to consider.
Weakness for discharge
Like credit cards, overspending is a real possibility with debit cards. Because of this, Pelletier cautions against giving a child a debit card that is directly linked to a parent’s checking account. A child who has not yet learned how to spend responsibly may go shopping, spending money in the bank meant for bills and other expenses. A special children’s debit card may be a safer option. The child gets a debit card linked to a separate checking account, which is owned and managed by the parents. Parents can set spending limits and monitor their child’s spending habits. Many of these debit cards for kids also allow parents to assign tasks via the accompanying app and deposit money after the tasks are completed. However, note that some of these kids debit cards charge a monthly fee.
Debit cards also have lower consumer and purchase protection compared to credit cards. If your debit card or card information is stolen and a fraudulent charge is made, you may not be responsible for it — but that depends on when you report the loss. Credit cards limit losses to $50, regardless of when the cardholder reports the fraudulent activity.
While debit cards can teach important money management lessons, they won’t have any impact on other long-term aspects of your child’s financial health. Debit card use isn’t reported to the three major credit bureaus, so it won’t affect their credit score — no matter how responsible your child is in using the card.
” READ: To raise financially smart kids, teach money lessons again
Where discharge shines
Accessibility is perhaps the biggest argument in favor of debit cards over credit cards. Some debit cards have no minimum age requirements at all and may be the only option if children are very young.
Spending with a debit card can also feel more real because purchases almost instantly reduce the balance available in your checking account whereas purchases with a credit card can be paid off later. The proximity of debit card transactions can encourage children to budget and be careful with their spending. And because debit card purchases are made with money already in your checking account, you don’t have to worry about paying interest on unpaid balances.
Credit and debit cards can be excellent, if not essential, tools for helping children learn to manage money. But both have inherent risks that parents should consider when deciding whether their child is ready for credit or debit card privileges. The risk becomes even more real once the cards are in the hands of the child, making parental guidance a necessity.
“I don’t want the parents to think that they can give the child a card and now we don’t have to talk about it,” Pelletier said. “Cards are great when accompanied by education and discussion.”