Not Another Plastic Toy: Teaching Kids To Use Credit Cards Wisely

The current cost of living crisis is causing Americans to save less and borrow more.

Federal Reserve data shows savings rates whittled to record lows in the last quarter of 2022. With inflation biting deeper into paychecks, more Americans are leaning on the plastic to get through.

Nearly half of American credit card holders carry over debt from month to month, according to a new survey from January 2023.

The current economic headwinds are taking a toll on people at all levels, and hitting middle-income households hardest, which begs the question – why do some pay the bills on time as others slip into debt? While circumstances may differ from person to person, like many habits in life, the roots of how we handle credit can go all the way to our childhood.

Ignorant and Indebted

While busy getting their education, many college kids are learning the wrong lessons when it comes to money.

Around 46% of college students who have credit cards have debt, according to a survey from U.S. News from September last year. Among that group, 27% say their credit card debt exceeds $2,000.

The average student borrows around $32,880 to achieve their bachelor's degree, according to the Education Data Initiative. Starting with so much debt can make entering the real world rocky. Those with credit card debt may need to learn how credit works.

The survey also found that four-fifths of college students need to learn what their credit score calculation is based on. Over 23% believe it is the amount of debt you have, 21.6% think it is the financial resources a person has to pay back a loan, while 12% think it is based on your knowledge of how loans work.

These misconceptions are impacting the way they handle their bills. Less than half of those surveyed knew that the longer they waited to pay off their card bill, the greater the damage to their credit score.

Starting Young

One way to equip young adults to handle credit better is to start their financial education at a younger age.

Giving a teen a credit card or debit card may sound like an anxiety-fueled excursion. Teens are not exactly known for their impulse control, responsible spending, or their money management skills.

Yet giving your teenager a credit card or debit card could be the best way to help them create a better financial future.

“I think a debit card would be best for a younger child and a credit card would be better for a teenager,” said Tim Woodward, CFP Co-Founder of Blend Wealth.

Debit cards give kids control over their cash in the bank but allow parents to monitor their spending. The debit card also teaches essential skills like managing money and budgeting.

That way, they learn more about not overspending, which could happen if they use credit cards.

Since many parents are opting for debit cards, an increasing number of debit cards designed for kids and teens are hitting the markets.

If children show they are ready to start paying in advance for items, parents may opt for one of the many credit cards made for kids.

Some parents may wish to add a child as an authorized user to one of their credit card accounts or choose a good teen credit card to use.

When handled correctly, teenagers may benefit significantly from holding a credit card. Credit cards can help them build a positive credit history, teach them to use credit responsibly, and let them earn rewards.

Many adults destroy their credit history by getting into too much credit card debt. Having the ability to control, teach, and observe responsible spending, a parent can help set up their child for a healthy financial future.

Credit cards have many benefits you cannot get from a debit card.

“Depending on the bank, they can get incentives such as a couple of hundred dollars for signing up,” Philip Weiss, CFA, CPA, and Principal at Apprise Wealth Management, said. “Debit cards don't help you build a credit history, and you have greater protection from fraud with credit cards over debit cards.”

The bonuses and consumer protections alone justify grabbing a credit card, but one of the best benefits is what it does to their credit scores.

Having a higher credit score shows banks you are responsible with money. That means lower interest rates on loans such as car loans or mortgages. You have the opportunity to apply for better credit cards in the future. Responsible credit card use can have a positive impact on that score.

A debit card or credit card can elevate a child's financial understanding. Equipping the child with an excellent education while at home enhances the chance of financial success as an adult. The goal is to prepare the child for a healthy debt-free future.

Though there are obvious risks in overborrowing, credit cards are a handy financial tool when handled with care. They can help young people build credit, earn rewards, and act as a safety net in emergencies. With proper parental supervision, exposure to credit cards can instill sound money management practices in children, such as budgeting, expense tracking, and paying bills on time. By learning to use credit cards responsibly, kids can gain practical financial know-how and have the wherewithal to get through the tough economic times they will face in the decades to come.

This article was produced and syndicated by Wealth of Geeks.