As your kids start to make more money decisions, they also need to think about how they’re making purchases. One option they’ll have when they get older is to use credit. Good credit can be very helpful when it comes time to get a loan to do something big like buy a house. But many of us have horror stories about making some bad decisions with credit before we understood how important it was.
In our final week of Million Bazillion Academy, let’s make sure our kids have the tools and information they need to be smart consumers.
We’ll explore:
- The costs and benefits of credit cards and debit cards
- Who can get a credit card and why
- Credit scores and how they work
To help your kids learn this knowledge, we’ve got these resources:
- One more “Million Bazillion” episode
- A worksheet to help your kids understand the difference between credit cards and debit cards
- A nifty video from the Federal Reserve showing how interest payments can add up
- More Marketplace stories for kids and parents who want to delve deeper
Credit cards are a tool that can help you buy stuff before you have all the money to pay. When you buy something with a credit card, you are borrowing money from a credit card company — money that you have to pay back in the future.
Paying with a plastic card is convenient because you can spend money without going to your bank to get cash, and credit cards are accepted all over the world. But fail to pay the money back on time and you may end up paying a lot more than you thought.
Listen to this!
Lots of vocab this week! Check your kids’ comprehension after listening to the “Million Bazillion” episode. Here are some concepts that they will have learned about:
- Credit is just another word for a loan. Having credit means you can borrow money up to a certain amount.
- A credit card is an item that allows you to use your approved credit to buy stuff. Every time you purchase something, the credit card company pays the store. Then, you must pay the credit card company back the money.
- Most credit cards have a credit limit, which is the most money that the person can spend using their credit card. Once the credit limit is reached, the person must pay some or all of it back before they can spend more money.
- A balance is any money that you spend with your credit card that you don’t pay back right away. Credit card companies usually require people who have a balance to make payments every month.
- Another word for a balance is debt, money that you owe to someone else.Using a credit card can be risky when your balance becomes greater than you can afford to pay back.
- If you don’t pay all the money you spend with your credit card back right away, you may have to pay interest, additionalmoney that the credit card company charges you, on top of the original cost of the items you bought.
- If you don’t make payments on your balance on time, you could also face late fees. Plus, your credit score, a grade that can impact your ability to get loans in the future, can also go down.
- Credit cards also help protect you from fraud, which occurs when someone uses your credit card information to buy something that you didn’t buy. You can report it the credit card company so that you won’t be held responsible for the charge.
The kids want to know!
“Million Bazillion” listener Elizabeth, 9, asked us, “What is a credit score?”
A credit score is like a grade given to adults that says how trustworthy or responsible they’ll be with credit. Pay back your loans on time, and your score goes higher. Fail to pay when you are supposed to, and your score will go down.
Having a good credit score is important when you want to borrow money to buy a car or a house. Banks will typically give adults with higher credit scores better deals when it comes to a mortgage or a car loan than if their score was low.
Kids usually have no credit history because they’ve never borrowed money from a bank. Without a history of paying off loans on time, banks don’t know whether they can trust kids or not, which is why they aren’t able to get a credit card on their own like their parents or other adults.
Using a credit card and paying off the balance on time can help someone improve their credit score.
Let’s compare credit cards and debit cards!
“Million Bazillion” listener Joss, 8, asked us, “What’s a debit card?”
Credit cards and debit cards may look similar, but they work differently. Your kids may also not know the difference.
If you have your own handy, show your kids a debit and a credit card. Ask them to spot the differences. The cards will look very similar to each other, but a debit card should have the word “debit” on it.
After your kids have listened to the “Million Bazillion” episode, have them watch this video, which explains the differences between credit cards and debit cards.
Download and print this worksheet for your kids to fill out to see how much they understand about the differences between them. (The second page has the answers.)
Even though debit cards and credit cards look the same, they work differently.
A debit card is directly tied to a person’s bank account. So, when someone uses a debit card to buy stuff, they are using money they already have in their bank account.
Unlike a credit card, you can’t buy something that costs more than the amount of money you have saved. That’s why a debit card can also be useful as a budgeting tool because you can’t overspend. When you try to buy something that costs more than what you have, your debit card will be declined.
Debit cards can be used to get cash from an ATM machine. Because you are withdrawing your own money, you also won’t be charged interest when you use a debit card. While it is technically possible to use a credit card at an ATM, the credit card company charges high fees and interest.
Like a credit card, a debit card gives people a way to access their money without having to go to a bank to withdraw cash. It also provides users with similar fraud protections, which help prevent thieves from using other people’s cards.
Extra credit!
If you or your kids want to learn more about credit cards, we recommend listening to these stories and podcasts from Marketplace.
- Want to delve deeper into the details about credits cards? Here’s a beginner’s guide from our podcast “Financially Inclined.”
- Thieves have been stealing credit card info at gas pumps. Now there’s an app to foil them.
- We all have a credit score. Or do we? (This story is part of a special series called “The Score” from “Marketplace Tech.”)
That’s it!
That’s the end of this iteration of Million Bazillion Academy! We’ll email you with next steps!