Credit Management for Kids: So What's all the Excitement About Plastic?

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Parent teaching child how to use credit card

How often do our kids see us pull out our debit cards to buy groceries, movie tickets, gasoline, etc.? Do they make the connection between the card and the cash in our account?

How about our use of the other type of plastic, credit cards? In practice, our use of credit and debit cards looks similar, but the behind-the-scenes implication is very different. Do your kids understand that when we use credit, we're making a promise to pay instead of paying with what we have?

Today's existing technology facilitates this activity. I can't think of a cleaner way to illustrate your debit card at work than pulling up your bank account on your mobile device before and after passing paying for a tank of gas. One moment you have $1,000 in checking, and the next you have $965 and a full tank of gas. Quick and easy.

Related: 5 Money Mistakes to Avoid in Your Twenties

To show your children the difference between paying with credit and debit, take another trip to the gas station. This time, explain that the charge shows up on your credit card account. While you could pay it off right away, what happens if you wait until the point that interest starts to accrue?

If you carry a balance, show your child a statement and review the "what if you make a minimum payment" section. Do they remember your earlier compound returns discussion? Now explain why that same concept can work against them. Do they really think the video game they bought for $100 is worth $200 -- because that might be what it would end up costing if they make minimum payments on their credit card.

This is a great opportunity to discuss the notion of their personal reputation, as well as how the concept applies to the way creditors view them. If you have time to talk more about their "credit reputation" and credit score, visit www.myannualcreditreport.com with your child and show them how it relates to building a solid credit reputation.

This was straightforward, right? When you're done, I hope your child will have a handle on the credit and debit equation -- and be poised to use credit in a responsible way.

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