Help Your Graduate Use Credit and Debit Cards Wisely

As your new graduate prepares to step into the next chapter of life – whether that’s more education or starting a career – one of the best things you can do is help them understand how to use credit cards, debit cards and prepaid cards wisely. They can be powerful financial tools, but without some basic knowledge, they can also lead to trouble.

Here are a few things for graduates, whether from high school or graduate school, should know.

Credit cards have benefits — and risks. About 69% of Americans ages 1829 have at least one credit card, according to the Federal Reserve. They can borrow money up to a set limit, pay it back and borrow again – a cycle known as revolving credit. Used responsibly, credit cards can help build their credit history, cover unexpected expenses and even earn rewards like cash back or travel discounts.

On the cautionary side, if your child or grandchild doesn’t pay the full balance each month, interest charges can accumulate quickly. Carrying a high balance relative to the credit limit can hurt their credit score. Perhaps most importantly, it’s easy to fall into a debt cycle in which they charge more than they can pay, interest can add up to more than the original purchases cost, and they might even open new cards to cover old ones. It creates a hole that’s hard to climb out of.

The key message is simple: pay off the balance monthly, pay on time and treat the card as a convenience, not a lifeline.

Debit cards can be a good option. Since debit cards draw directly from a bank account, they naturally limit overspending. But they aren’t risk-free. Overdrawing the account can trigger fees, and debit cards generally offer fewer fraud protections than credit cards. Additionally, since you’re spending your own money rather than borrowing, debit cards don’t help build a credit score. Still, for a young person just starting out, a debit card can be a practical way to manage day-to-day spending.

Prepaid cards can help teach the basics. Money is loaded onto the card before use, and your young adult can only spend what’s already on the card. Because of this, there’s no risk of debt, no credit history needed and no bills to pay.

Prepaid cards come in several forms. General purpose reloadable cards can be used anywhere cards are accepted. Payroll cards are sometimes used by employers to distribute wages. Gift cards are another option.

The downside is that prepaid cards typically don’t help build a credit history, since transactions usually aren’t reported to credit bureaus. Some also come with fees for activation, reloading or transactions. These fees can add up, so it pays to read the fine print.

Teaching your graduate the difference between these tools, and how to develop good habits for each, can help them build financial confidence for decades to come.