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Kids and money: The ABCs of debt

January 16, 2014


What if you wanted to buy something, such as a toy that costs $10 but you only have $7?

OK, so you don't have enough money to pay for the toy now, but let's say you really want it. One thing you could do is wait until you save the extra $3 and then buy it. Or you might ask your parents or a friend to lend you the $3 now and promise to pay them back. When you borrow money and need to pay it back, this is called going into debt.

Debt is the money a person, business or even a government owes to another person, business or government. Usually, a person who borrows the money agrees to pay it back within a certain period of time and he or she is charged "interest" on the borrowed money. Interest is an extra amount of money you need to repay the lender so you can use money you borrowed. Sometimes you may repay the debt a bit at a time and when you do that, the amount of the debt is reduced by what you paid.

People go into debt when they need or want something, but don't have enough money right now to pay for it. Your parents may have borrowed money to buy your home or car or for an awesome family vacation.

Did you know that credit cards are also a kind of debt? If your mom bought that $10 toy (or your $100 shoes for basketball) with a credit card, she would be in debt to the credit card company until she paid the money back.

Being in debt for a lot of money is a serious problem in the United States (and the world) these days. Many people have borrowed much more money than they can afford to pay back. These people get into financial trouble. Sometimes the problem is so bad that people may no longer be allowed to buy things with a credit card or they may even lose their car or their house. But if you are careful about debt and smart about paying it back, then borrowing money can actually help you buy the things you want and help you enjoy your life.

Four fun facts about money