November is Financial Literacy Month! Have you ever wondered about what the best financial tools for kids are? Have you considered getting a debit or credit card for your child? Of course, there are pros and cons to this approach. On the one hand, a credit card can teach the child the value of earning credit and paying off debt. On the other hand, if not handled well it could mean a negative financial start for your child.

The positives of credit cards for kids

Teaching a child how credit cards work and getting them started building credit early will equip them with strong financial skills later in life. If you have a good credit history, you can add your child as an authorized user on your account. Some credit card companies will report that information in the child’s credit history. This will allow them to build credit early in life. This means they are less likely to need you to co-sign on loans in the future. With this method, you don’t even have to give them a card. As long as they are added to the account, they will start building a credit history. The child then has the potential to start adulthood with an excellent credit score.

The negatives of credit cards for kids

Of course, the temptation for shopping sprees will always be present for a child. If this financial experiment goes poorly, it could end up costing you a lot of money. While they may still learn a valuable lesson from irresponsible spending, it will still hurt your wallet.

Setting up spending boundaries should help mitigate risks. You could have them use a credit card with a small credit limit for regular monthly bills, such as for their cell phone. Then they may use a prepaid debit card for other expenses like clothes. That way, they have limits on how much they can spend, but are still growing their credit history. Using this method, you may teach them how to set up autopay to avoid late fees and interest charges, how to monitor for fraud and the dangers of identity theft. Ensure you communicate with your child what the spending limits are and what the consequences will be if they go over. There are certain credit card companies that allow more control over authorized users, such as American Express. Some Visa debit cards also allow for goal setting, rounding up purchases into a savings account, parental controls with freezing ability and more. Talk to your financial institution to discover your options.

Another downside to your child having a physical credit card is that they must be trusted not to lose it. The stakes are a little higher when a credit card is lost than when a small amount of cash is lost. As their parent, you are the best judge as to whether your child is prepared for the responsibility.

Debit cards for kids

There are many benefits to giving your child a debit card. Being in control of their money can lend itself to better budgeting and making smart financial decisions. Debit cards are also a great way to prepare your child for a credit card. Using a debit card also prepares them for digital banking in adulthood. The same boundaries as outlined above should be in place for your child’s debit card.

If children are taught well and the credit or debit card is used appropriately, these tools can help them build a bright financial future.

Learn more about financial literacy for kids

• Financial Literacy for Children
• Financial Literacy for Kids
• Kids and Debit Cards: Are They a Good Match?
• Money matters for kids
• Parents Giving Kids Credit Cards—The Good, The Bad, And The Ugly
• Teaching teens about credit