These days, the reigning way to pay is with plastic, but which is better for your kids? Figuring that out requires you to understand how these two types of cards are different.
Borrowed vs. Personal Funds
With a debit card, your child is accessing money he already has in his bank account, not borrowing funds he has to pay back later. Subsequently, he doesn’t have to pay anything in interest on the purchases he makes, although banks can charge monthly fees like credit card companies do. Additionally, unless he gets overdraft protection, he can’t spend more than what he has in the account. Debit cards also won’t help him establish a credit rating because he’s not borrowing.
Your child will need to pay back at least some of what he spends on a credit card every month. Not all children are prepared to keep track of what they are purchasing and make a plan for paying the way this requires. Debit cards don’t involve monthly payments, but you’ll still need to teach him to look at his bank statements on a regular basis and verify that all of the transactions are accurate and authorized.
With a credit card, your child has to make sure he doesn’t spend beyond what his credit limit allows. If he does, penalties can apply. The spending limit on a credit card is normally static, although a credit card company can increase it if your child handles the card responsibly over time. By contrast, with a debit card, he has to pay attention to his bank balance. This can be a little tricky, because if he is also writing checks, he has to account for the ones that haven’t cleared, as well as any deposits that aren’t yet showing up. The spending limit is determined by how much your child has in the account, which can fluctuate on a daily basis.
Where to Use the Card
Your child should be able to use a debit card just about anywhere he can use a credit card, as most debit cards are issued in association with the same companies that offer credit accounts, such as Visa. When he swipes a debit card, however, he probably won’t have to show an ID, and perhaps a little confusingly, he will have a choice about whether to run the transaction as debit or credit. (Running it as a credit means that the bank may allow the transaction to proceed even if there isn’t enough money in the account, assuming he has overdraft protection, and that the credit card company associated with the debit card extends protections against fraud and theft.)
ATMs and Advances
Most debit cards double as ATM cards, so your child will be able to withdraw cash or make a deposit into his account through ATMs. Watch out, though—make sure he understands that fees can apply if he uses an ATM that’s not in the bank’s network. Your child can obtain a cash advance at an ATM with a credit card, but surcharges usually apply. For fraud protection, credit cards can have limits on cash advances based on the credit line, and debit cards might have a standard daily limit your child can withdraw.
In order for a minor to get a credit card, you typically have to cosign. That makes you responsible for the debt they acquire. You might need to cosign with a debit card, as well, depending on whether the card is linked to a savings or checking account.
Credit cards and debit cards have many differences. The general consensus from financial experts is that, because credit cards require more preplanning, they are better for older children who already have learned to budget and manage money responsibly. Debit cards typically are good stepping stones from cash. When your child is ready to transition from one to the other depends on his personal experience and development.
You are responsible as the cosigner—better to teach them not to overdraw with the debit card first