For Parents

How to Explain How Credit Cards Work to Your Kids

In this article, we break down the different components of credit cards in a way that is easy for you to teach your kids.

credit-card

The first step in teaching financial basics is to teach from the ground up on topics like what currency is and how it can be spent, where money comes from, and the impact money has on our society. Once the basics have been covered, learning about debit and credit cards, allowances, and budgeting is the next logical step.

Kids need us to teach them about financial literacy because schools don’t spend much time prioritizing personal finance topics. Let’s discuss credit cards and responsible usage!

How to Explain What a Credit Card Is

Depending on the age of the child, debit and credit cards can look virtually the same so explaining the differences between them is important. Teach kids that credit cards aren’t tied to a bank account and that they are spending the bank’s money rather than their own. Share your own experience with debt and how those lessons have impacted your life. 

Some of us have debt or have worked hard to get out of debt, while others have avoided carrying debt at all. Whatever your experience, it’s important to share the financial lessons we’ve learned with our kids.

How to Explain How Credit Cards Work

One primary point about credit cards is how interest works if purchases aren’t paid in full by the due date. Knowing the interest rate and that it can change if you choose to take out a cash advance rather than make purchases, the interest payment can be calculated using an online interest calculator.

Using a credit card wisely can help establish a good credit history by paying on time and regularly using the card. Kids should understand how credit history works and how having a good score will help them in life by paying less interest fees and having the freedom to use credit when needed for once-in-a-lifetime opportunities like a trip to Bali or a safe vehicle for their family.

How to Explain The Benefits of Credit Cards

One way to teach about the benefits of credit cards is to explain the different offers from credit card lenders. Some credit cards offer cash rewards, and others offer travel reward points. Explaining to kids the different offers and what each one would help them with is a great way to educate and inform.

Explain to kids what identity theft is and how using credit cards allows the borrower’s money to stay safe in the bank in the event their credit card information is compromised. There is cardholder protection in place in the event of identity theft but you have to go through the proper channels of reporting the crime that occurred. When using a debit card for purchases, there is a chance that your card can be hacked and money spent out of your account before you have the chance to stop it. I use my credit card for most purchases for free but check with the vendor before using a credit card to make sure you won’t have to pay a fee for using it.

How to Explain The Dangers of Credit Cards if Used Incorrectly

Interest charges can quickly add up and increase the monthly payment due. Explain to kids that if the monthly payment is not paid before the due date every month, the lender will charge late fees on top of interest charges. 

Late payments on any kind of debt will be recorded on their credit history and decrease the likelihood of being lent money in the future because lenders are looking for borrowers that have a good payment history.

Most lenders start new borrowers with introductory cards with a $300-500 limit and move up to $1,000 or $2,000 within 6-12 months, depending on how the borrower chooses to use the card. It’s easy to get sucked into a slippery slope of mounting credit card debt and multiple credit cards with outstanding balances on them.

How to Set a Good Example

Use your credit cards responsibly in front of your kids, so they see how credit cards are used. Explain transactions to them or have them use the card to pay under your supervision. Try to pay the cards off in full every month before the due date to prevent having to pay interest. If you do end up carrying a balance for a few months, make the minimum payment on time to avoid late fees. 

Sit down with your child once a month to go over the statement to show what purchases were made and what payments have been made. Use an online calculator to determine what interest would be charged by the lender if the card is not paid in full for that statement period. 

Show them what a credit report looks like and explain the three credit reporting bureaus. Talk about the importance of a credit score and what goes into determining your credit score with ways to improve the score if yours is currently lower than what you’d like. Kids don’t expect us to be perfect; they just need us to set a good example for them. Start from where you are and make a plan for how to move forward; involve your kids in that forward progress.

Credit Card Definitions

  • Credit card: Payment type where transactions are charged against a personal line of credit and not a bank account.
  • Debit card: Payment type that pulls funds for transactions directly from the purchaser’s bank account.
  • Financial literacy: Basic understanding of financial concepts such as savings, spending, giving, and debt.
  • Interest: Fees paid on an amount of money that has been loaned, borrowed, or invested.
  • Interest rate: The cost of borrowing money expressed as a percentage of the total amount loaned or invested.
  • Cash advance: Money provided by a lender at a higher interest rate than usual for funds available for immediate use and charged against your line of credit.
  • Interest calculator: An online tool to help determine how much interest will be owed depending on the loan amount and interest rate.
  • Cash rewards: Qualifying purchases earn a cardholder rewards in the form of cash back, merchandise, discounts on purchases, or gift cards.
  • Travel points: Earn a certain amount of points for every qualifying purchase made with a travel rewards credit card. Points can be used for travel, discounts, and higher rewards during peak promotions.
  • Identity theft: A crime in which personal data is used fraudulently for economic gain.
  • Borrower: A person or business that borrows something from someone else or from a lender and is charged interest on the loan.
  • Lender: A person or business that loans something like currency in exchange for interest payments.
  • Due date: The day of the month when the bill is due or interest has to be paid on the amount owed.
  • Late fees: A fine charged to an account if an account holder fails to make a payment by the due date or within the grace period after the due date.
  • Credit history: A record of how a person has managed debt in the past by looking at debt usage, payment history, and number of open credit lines compared to current income to decide whether or not to loan the person more money.

Books and Resources You Can Use to Help Teach Your Kids Smart Credit Card Habits

Make Your Kid A Money Genius (Even If You’re Not): A Parents’ Guide for Kids 3 to 23 By Beth Kobliner helps parents have the “money talk” with kids as young as 3! Start with positive values like working hard and delayed gratification, then move to how to use a credit card responsibly.

Finance 101 for Kids: Money Lessons Children Cannot Afford to Miss By Walter Andal is written by a father with lessons that he taught his own children, from how to make and earn money to managing credit card debt responsibly to stock market basics.

Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! By Robert Kiyosaki teaches parents how to have money talks with kids and use debt as leverage to buy investments rather than liabilities. This book challenges traditional financial beliefs that debt is bad and should never be used but is eye-opening to a new world of thinking.

Money-Savvy Kids: Parenting Penny-Wise Kids in a Money-Hungry World By J. Raymond Albrektson helps parents teach your kids how to responsibly manage money and debt to avoid the pitfalls of taking on unhealthy amounts of debt. Prepare kids to face the “buy now, pay later” marketing gimmicks aimed at young adults as they enter the world by starting their education from a young age.

The Everything Kids’ Money Book: Earn it, save it, and watch it grow! By Brette Sember is the everything book of personal finance for kids that parents can refer to as kids grow and have questions. Topics covered include credit cards and how they work, money management, savings, spending, investing, and how to open a bank account.

Related Reading For You and Your Kids

About the Author

Jessica Anglin

Jessica was raised in a household where her parents didn't know how to pay bills on time and indulged in life's pleasures on a consistent basis in order to cover the misery from working jobs they hated for money that wasn't enough to live off of. She took on the role of caregiver to 4 siblings at age 15 and started her first business selling tie-dye t-shirts in order to buy food and provide a stable home. Nineteen years later, she owns three successful businesses, has earned an MBA in Finance, and works daily to set an example for the next generation on how to build wealth so they never face the same struggles.

Last updated on: June 7, 2022