Prepaid debit cards are popular with some parents because such cards provide the experience of paying with plastic without actually borrowing money and without the chance of overdrafting. Prepaid debit cards are touted as valuable aids in teaching teenagers about money management. However, the recent furor over some celebrity-endorsed prepaid debit cards has many re-examining their role.
Advantages of prepaid debit cards
Prepaid debit cards do come equipped with some advantages. Parents can easily load a teen’s allowance onto the debit card. Most prepaid debit cards also include a direct deposit option, so a paycheck from a part-time job can be deposited to the card. Some prepaid debit cards even encourage savings.
Prepaid debit cards are easy to use because they are emblazoned with credit card company logos, and they are therefore accepted everywhere credit cards are. Teenagers can learn how to manage small amounts of money before they start handling larger amounts. Encourage your teens to track their spending so that they know how much is left on the card and so that they can develop good habits early on.
Disadvantages of prepaid debit cards
The biggest downside to prepaid debit card usage is all of the fees. Some cards charge more fees than others, but some common fees charged include:
- Fees to activate or “buy” the card.
- Fees to reload the card.
- Fees for monthly maintenance.
- Fees to use an ATM (including to check the card balance).
- Fees for access to customer service.
- Fees attached to paying bills.
- Fees to withdraw cash.
In some cases, card users may pay anywhere between $30 and $100 a year on fees—just to access their own money. You need to think about what kind of financial lesson you are teaching your child if you use a fee-ridden prepaid debit card as a money management tool.
Learning money management lessons
There are a few prepaid debit cards with much lower fees, and some prepaid debit cards have no fees at all. Teach your child a valuable lesson by having him or her help you comparison shop to look for the best deal. You will save money in fees and your teenager will participate in an important financial exercise.
You may want to start your search at your local bank or credit union. It might have a prepaid debit card geared toward teenage customers, or you can help your child open a checking account and a savings account instead. Depending on state law and the bank in question, you can probably open a joint account with your teenager. In some cases, your teenager might even be able to get a debit card in his or her name (more likely if your child is at least 16).
If you are concerned about overdrafts, you now have the ability to opt out of standard overdraft services. If you do opt out, your teen will be unable to withdraw money from an ATM or complete a purchase, if there isn’t enough money in the shared account to cover the transaction. You can limit some of the ability to overspend while still providing your teen with the means to become used to using plastic as a payment method.
Keep tabs on your teen’s spending. Encourage him or her to track expenses, and regularly review the account statements. Set ground rules and enforce them. In the end, using a joint bank account to teach these lessons—especially since you have access to the account and can monitor it at all times—may be more effective in teaching real world money lessons than a prepaid debit card.
Miranda Marquit is a freelance journalist specializing in financial topics. Read more of her writing on Huffington Post, Wise Bread, AllBusiness, and at her website, Planting Money Seeds. Follow her on Twitter: @MMarquit