What Is Debt?
Quick Answer
Debt is money that you owe to someone else because you borrowed it. If you borrow $20 from a friend, you are in debt until you pay it back. Adults often borrow money from banks to pay for big things like houses and cars, and they pay it back a little bit at a time, usually with extra money added on called interest.
Explaining By Age Group
Ages 3-5 Simple Explanation
You know how sometimes you might borrow a crayon from a friend? And you have to give it back later? Well, debt is like that, but with money. If someone lets you borrow money, you owe it to them until you give it back. That's debt.
Grownups borrow money sometimes because some things cost a LOT — like houses and cars. They can't pay for it all at once, so a bank gives them the money and they pay it back little by little over time. While they're paying it back, they have debt.
Having some debt is normal for grownups. Almost all families owe money for their house or car. They make payments every month, kind of like how you might do a little bit of your chores each day instead of all at once.
The important thing about debt is to always pay it back when you're supposed to. If you borrow something from a friend, you give it back. Grownups do the same with money — they pay back what they borrowed so they can be trusted to borrow again if they need to.
Ages 6-8 More Detail
Debt is the money you owe someone because you borrowed it. If your friend lends you $5 for lunch, you're in debt to your friend until you pay that $5 back. It's that simple. Adults deal with debt in a similar way, just with much bigger amounts.
Most adults have some kind of debt. If your family owns a home, they probably borrowed money from a bank to buy it — that's called a mortgage. If they bought a car with a loan, they owe money for that too. Credit cards also create debt when people buy things and pay for them later.
When you borrow money from a bank, you usually have to pay back more than you borrowed. That extra amount is called interest — it's what the bank charges you for letting you use their money. The longer you take to pay back a loan, the more interest you end up paying.
Some debt is considered smart. Borrowing money to buy a home or to go to college can be a good decision because those things help you in the long run. But borrowing too much money for things you don't really need can become a big problem.
The key to handling debt well is making sure you can afford the payments. If someone borrows more money than they can pay back, they get into trouble. Bills pile up, they get charged even more in fees, and it becomes really stressful. That's why learning about debt when you're young is so important.
Ages 9-12 Full Explanation
Debt is money that you owe because you borrowed it from someone — usually a bank, credit card company, or lender. When you take on debt, you're essentially spending money you haven't earned yet, with the promise to pay it back later. Almost every adult has some form of debt, and when managed well, it's a normal part of financial life.
There are different kinds of debt, and not all of them are equal. A mortgage (a loan to buy a house) is generally considered 'good debt' because a house usually grows in value over time. Student loans to pay for college can also be worthwhile because education tends to lead to higher earnings. On the other hand, racking up credit card debt on things like clothes and electronics is usually considered 'bad debt' because those items lose value fast while the interest charges pile up.
Interest is what makes debt tricky. When you borrow money, you pay back the original amount plus interest — a percentage the lender charges for letting you use their money. If you borrow $1,000 at 5% interest for one year, you'd owe $1,050. But credit cards often charge 20% or more, which means a $1,000 balance could quickly balloon if you only make minimum payments.
The concept of compound interest works against you when you're in debt, just as it works for you when you're saving. If you don't pay off your credit card in full, you start paying interest on top of interest. A $500 purchase on a high-interest credit card could end up costing you $700 or more if you take years to pay it off. That's why financial experts always say: pay off debt as fast as you can.
Too much debt can create serious problems. People who owe more than they can pay back may have to declare bankruptcy, which is a legal process that says 'I can't pay my debts.' It damages your ability to borrow money in the future and can take years to recover from. This is why living within your means — not spending more than you earn — is one of the most important money habits you can build.
Countries have debt too, called national debt. The U.S. government borrows money by selling bonds and owes trillions of dollars. Government debt works differently from personal debt, but the basic idea is the same — money borrowed that has to be paid back. Whether personal or national, understanding debt helps you make smarter decisions about money.
Want explanations personalized for YOUR child's exact age?
Download WhyBuddy free on the App Store. Get instant, age-appropriate answers to any question your child asks.
Tips for Parents
Debt can be a challenging topic to discuss with your child. Here are some practical tips to help guide the conversation:
DO: Follow your child's lead. Let them ask questions at their own pace rather than overwhelming them with information they haven't asked for yet. If they seem satisfied with a simple answer, that's okay — they'll come back with more questions when they're ready.
DO: Use honest, age-appropriate language. You don't need to share every detail, but avoid making up stories or deflecting. Kids can sense when you're being evasive, and honesty builds trust.
DO: Validate their feelings. Whatever emotion your child has in response to learning about debt, acknowledge it. Say things like 'It makes sense that you'd feel that way' or 'That's a really good question.'
DON'T: Don't dismiss their curiosity. Responses like 'You're too young for that' or 'Don't worry about it' can make children feel like their questions are wrong or shameful. If you're not ready to answer, say 'That's an important question. Let me think about the best way to explain it, and we'll talk about it tonight.'
DO: Create an ongoing dialogue. One conversation usually isn't enough. Let your child know that they can always come back to you with more questions about debt. This makes them more likely to come to you rather than seeking potentially unreliable sources.
Common Follow-Up Questions Kids Ask
After discussing debt, your child might also ask:
Is all debt bad?
No. Some debt is considered smart when it helps you build something valuable. A mortgage helps you own a home that may grow in value. Student loans help you get an education that leads to better jobs. The key is borrowing only what you can afford to pay back and avoiding high-interest debt on things that lose value quickly.
What happens if you can't pay back your debt?
If you can't pay back what you owe, you may face late fees, higher interest charges, and damage to your credit score (a number that shows how trustworthy you are with money). In serious cases, people may have to declare bankruptcy. That's why it's important to only borrow what you know you can repay.
What is a credit score?
A credit score is a number (usually between 300 and 850) that shows how responsible you are with borrowing and paying back money. Paying bills on time and not owing too much raises your score. A high score makes it easier and cheaper to borrow money in the future, while a low score makes it harder.
Why do people use credit cards if they create debt?
Credit cards are convenient and safe for everyday purchases. The key is paying off the full balance each month so you don't owe interest. When used responsibly, credit cards can actually help build a good credit score. Problems happen when people charge more than they can afford and carry a balance month after month.
What is the national debt?
The national debt is the total amount of money a country's government owes. The U.S. national debt is trillions of dollars, borrowed to pay for things like the military, Social Security, healthcare, and roads. The government pays it back over time through taxes and by issuing new bonds. It's a complex and often debated topic in politics.
You Might Also Want to Explain
Want explanations personalized for YOUR child's exact age?
Download WhyBuddy free on the App Store. Get instant, age-appropriate answers to any question your child asks.