How to Explain Debt to a Child

My husband and I were talking about the World Cup this morning and how expensive the tickets are. I heard that many people get into credit card debt just to fly over and watch the games. Our 6-year-old son overheard our conversation and asked, "What's a debt?"

Ah ha, I thought. Another opportunity to explain a financial concept. Right up my alley. 

So here's what I told him:

What Is a Debt?

A debt is when you owe someone else money.

Let's say you only have $5 in your piggy bank, but you want to buy a toy that costs $10. You don't have enough, so you borrow the extra $5 from mom. Now you owe mom $5. That means you are $5 in debt. Simple as that.

So What Is a Credit Card Debt?

When someone uses a credit card to pay for something, they are borrowing money from the bank. They are expected to pay the bank back later.

The problem comes when people can't pay back the full amount. The bank then charges extra money on whatever is left unpaid. This extra charge is called interest. (For a deeper dive into how credit cards work, check out What Is a Credit Card? in the Little Economists series.)

Let's say those World Cup tickets cost $100 each (for simplicity, I wish they were that cheap!). You use a credit card to buy a ticket, but at the end of the month you can only pay back $20. Now you still owe the bank $80, and the bank starts charging you interest on that $80. Next month, you owe even more than $80, even though you didn't buy anything new. The debt keeps growing until you pay it all off. That's how people end up still paying for a soccer game months, or even years.

I hope this article sparks some fun money conversations in your household.

Kelly Lee