How I Explained to My Kid That a Credit Card is Not Free Money

How I Explained to My Kid That a Credit Card is Not Free Money

My son and I were shopping at the store the other day. He saw a remote control car (one of those heavy-duty ones,) and asked me if he could get it. I flipped it back on him “You tell me, do you have enough money for it?” He grunted, knowing that he recently spent his money on an action figure and is now in the process of replenishing his GoHenry account.

 

He put the car back and sourly said, “I wish I had a credit card so I can swipe and get whatever I want!" What?! I froze for a second, we have been working with him on earning, saving, spending, where was this coming from? “What makes you think you can get whatever you want with a credit card?” I ask. He answers with,  “Isn’t it how adults buy things when they run out of money?”

 

 

When we got home, this sparked a conversation about credit cards and the difference between credit and debit. This is how I approached it. 

1. What is a credit card?

Credit is not free money, it is money you borrow from a bank. Tying it back to a situation he can relate to, I reminded him of the Star Wars action figure he wanted. He was $10 short of the full amount. With his allowance being a few days away, I offered to give him the $10 he needed, on the condition he pays me back when his money comes in.

 

Using that reference, I explained that the $10 was a credit and that a credit card works the same way. A key difference is you are borrowing it from a bank, that doesn’t know you and not a parent who loves you. 

Further explaining that:

  • You can use a credit card to buy things with borrowed money, when you know that you can pay it back
  • Credit card companies give you one month to pay them back for the things you buy. 
  • If you don't pay it all back, they charge you an extra fee called interest.
  • Over time, these fees can add up to hundreds or thousands of dollars if you don’t pay back all the money you borrowed every month.

2. How is a debit card different from a credit card?

Having his own kids debit card, I wanted to help him understand the difference between how a credit card works compared to his debit card. Understanding the importance of spending only what they can afford, rather than borrowing money to buy things they may not be able to pay back is a key differentiator.

 

Using an example my kid could relate to, I explained the debit card like this: 

 

If you spend $10 to buy pizza, your account has $10 less in it. If you spend all your money, and you have $0 in your account, you won't be able to buy anything with your debit card, until your allowance comes in. With your debit card, you spend money you already have.

 

And the credit card in the same way:

 

You want to buy that $10 pizza, but your account only has $5 in it. So now you can use your credit card to buy the pizza. This means you owe the bank $10, but since you have $5 in your account, and your $10 allowance will be added in a few days, you will have enough to pay back the $10 (with some leftover). This is a good way to use your credit card, because you know for certain, that you will have the money to pay it back on time. You can afford it.

 

The danger starts if you decide to buy two pizzas, borrowing $20 from the bank, but you only have enough money to pay some of it back. With $5 in your account, plus your $10 allowance, at the end of the month, you can only pay back $15. This means you still owe $5 to the bank. Now, the bank will charge you an extra $1 fee for not paying their money back in full. So, next month, you will start the month, owing $6 to the bank.

 

If you borrow more that month, and you can’t pay it back, then the amount you owe will keep getting bigger and the bank will keep adding fees and it will get very hard to pay it all back. Like a teacher marking you in school, the bank will mark you as not being good at paying them back - giving you a low credit score.  

 

3. Why do we need good credit?

In understanding how credit works, it's important to note that good credit can be a helpful financial tool. Having good credit history can make it easier for you to buy a house, get a cell phone plan, rent a house, buy a car, the list goes on.

 

These companies will want to see your credit history and check your credit score (how the bank marks you on how well you use your credit card.) They want to know if you will pay their money back on time, or not. If the answer is no, then you will have a harder time getting access. If yes, then it will make your life much easier.

Always learning

As a parent, we are always faced with questions from our kids and I’m finding that the older they get the harder it gets!  Teaching complex concepts like credit or debt is not something I even thought about until that day at the store.

 

But I can say that since my son started using his own debit card, he’s been more interested in learning about money and how it works,  making it easier for us to have conversations like these around credit and debt. Hopefully, it will give him a solid foundation for when he’s older and gets his own credit card - or cards!

 

 

How would you respond to your child in this situation? Share your experience tagging @gohenry with #letstalkmoney on Twitter or Facebook

 

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Written by Natalie Abenhaim Published Feb 22, 2022 ● 3 min. read