I remember when I received my first credit card offer. I was 18 and fresh out of high school and, frankly, I was flattered that Visa thought I was responsible enough for a card. Of course, I know now that pretty much every 18-year-old receives credit card offers, but at the time I couldn’t wait to get my own. I signed up and was later mailed my shiny card, which came with a $1,500 credit limit.
As a reformed spender, I can tell you now how bad it was for me to have a credit card before I understood the risks. It wasn’t long before I started thinking of my credit card limit as “my money.” Even though I didn’t have any money in the bank – I worked as an office manager for slightly over minimum wage – I felt like my credit limit was a little cushion of cash just waiting for me to spend. Unfortunately, I used every penny to buy new clothing, pay my phone bill, and spring for dinner for my friends.
As you might have guessed, it all caught up to me – sooner rather than later. At 19, I understood the pain of having to pay back all of that “free money,” and for the first time I got a look at how difficult it can be to get out of debt. If this sounds like a cautionary tale, it is. I wasn’t smart with credit cards as a teen because unfortunately I had never heard of balances and interest rates before I started swiping.
Prepaid Debit Cards as an Alternative to Credit Cards
Thankfully, parents who don’t want a credit crash to mar their teen’s credit history and bank account have a choice. You may have seen commercials for prepaid debit cards – Justin Bieber is the spokesman for a teen-centric card called SpendSmart. A prepaid debit card can give teens a sense of the mechanics of credit and of staying within a balance, but without the dangers of a real credit card. It sounds like a genius money move, but before you sign your teen up, make sure you understand the advantages and disadvantages.
Most prepaid debit cards work in much the same way. You can purchase them from a store or you can sign up online. Once you sign up, you can then fund the card, usually in an online or by-phone transaction. The actual amount you’re required to put on the card varies from provider to provider, but can be as low as $25. Once funded, you can set up a PIN number and hand the card over to your teen for use. You or your teen can then reload the card as needed, in the same way it was originally funded. You can also receive a statement akin to that of a credit card, if you choose. If stolen or lost, you can cancel the card and may even have the funds replaced, depending on your card provider.
From the lessons they can provide on financial responsibility to the ease of use, there are plenty of great reasons to sign your kids up for prepaid debit cards. Here are a few of them:
- Your Teen Can Use It Online. Let’s face it: Most teens have online accounts for everything from gaming to buying books for their Kindles. If you’re worried about your teen using your credit card for these items, a prepaid debit card makes more sense. It processes like a credit card online, but you always control how much is being spent and there’s no interest. If your teen has a smartphone or tablet, prepaid debit cards allow personalized online IDs and they also help facilitate spending on games, apps, and other media without your teen relying on your credit card.
- It’s Safer Than Cash. Sure, cash is usually king, especially when it comes to teen purchases such as clothes, food, and entertainment, but not all teens are careful with their cash. A lost wallet or a forgotten backpack can mean the loss of that money forever. At least with a prepaid debit card, your teen can call and cancel it if the card is misplaced with no harm done. It gives you some much-needed peace of mind when your child is traveling without you.
- It Teaches Your Teen About Earning and Budgeting. The problem with credit cards is that they teach teens a questionable lesson about budgeting. With my first card, I learned that if I didn’t have the money personally, Visa had my back, which led to overspending and a high balance. A prepaid debit card tells teens the opposite – the money has to be earned before it’s spent. If your teen wants a new pair of shoes, the money must first be earned and then properly budgeted.
- You Get the Control. If your teen still receives an allowance, a prepaid debit card can put you in control of how much or how little your teen spends. For instance, if you’ve talked about savings as part of your child’s budget, you can put some money in a traditional savings account and then put spending money on the debit card to avoid your teen dipping into savings to pay for a night at the movies. Most prepaid debit cards also require authorization and access from parents, so you can check the balance and your teen’s spending history, which can open up a further dialogue about budgeting.
While a prepaid debit card might seem like a no-brainer for teen spending, there are a few things you need to watch out for. Here are some potential pitfalls you should be aware of before deciding whether or not to get one for your child:
- Fees Can Add Up. Fees are how companies make money off of prepaid debit cards. You can expect to be charged for everything from activation to monthly use and even ATM fees for withdrawing cash. These can really add up, especially if you’re the one managing the card. Fees range from $1 to $3 for an ATM withdrawal to as much as $5 to $10 for monthly usage fees.
- They Don’t Affect Credit. If you’re hoping to use a prepaid debit card to improve your teen’s credit score before venturing off to college and trying to finance items like student loans or a car, you can forget about it. Prepaid debit cards are viewed the same as bank accounts by the credit bureaus and don’t count as a loan or credit card. Teens can spend with their cards, but even the best spending habits won’t show through on a credit score.
- It Could Be a Difficult Transition. While prepaid debit cards can help teens get used to using plastic, switching over to student credit cards when they get older could prove problematic. After all, the debit card more or less controls how teens spend – when the money is gone, it’s gone. With a credit card, teens might feel liberated and look at their credit limits as free money to be spent. They won’t be accustomed to things like minimum payments, fees, and paying back the charged amount to a credit card company. Parents need to discuss responsible credit card usage with any teen accustomed to a debit card.
How to Find and Properly Use Prepaid Debit Cards
If you think that a prepaid debit card is the best way to teach your teen about smart spending, proceed with caution. Make sure you both agree on usage and have a frank conversation about money management – one that you revisit often.
1. Comparison Shop for the Best Deal
Remember that not all prepaid debit cards are created equal. Fees are often the deciding factor as to which card is the best deal. Also, some cards require that you keep a minimum amount of cash on balance at all times – as high as $500 per month, which can be too steep for the average teen. Look instead for a card with low fees and a manageable minimum monthly balance.
Some cards geared toward teens include:
- PASS from American Express. It has minimal fees – your teen gets one free ATM withdrawal each month and then it’s only $2 for each withdrawal after that. There are no monthly fees or charges for reloading the card, but you must load it with a minimum of $25, and reload with a minimum of $20.
- Visa BUXX. The BUXX card is backed by Visa and charges a $5 monthly fee. The minimum first load and reload amount is $20. You pay between $2.50 and $5 to reload it (depending on the issuing bank), and it offers free withdrawals at 70,000 participating banks.
- SpendSmart. Backed by MasterCard, the SpendSmart card charges $0.75 to load from another bank account, imposes a $1.50 fee for each ATM withdrawal, and requires a minimum balance of $20. Both the initial load and reloads must be at least $20. Watch out though – there is a $3 charge for 30 days of inactivity, so it should be canceled if no longer in use.
2. Create a Contract
If you’re going to apply for and maintain the card as a parent, you need to create a spending contract with your teen. Talk about what you expect, such as smart usage habits, your child’s contributions to the card, and paying fees. You might also place restrictions on using the card online or implement disciplinary action if the card is abused.
3. Write a Budget
Finally – and most importantly – take the time to prepare a budget for your teen, including any money earned from part-time jobs and detailing expenses for which they are responsible, such as a phone bill or debit card fees. Your teen should see clearly what ought to be saved and what is allowed to be spent. This lesson in budgeting can be an eye-opening experience and one that your teen can draw upon years later, especially when the need to be more financially responsible arises. Revisit your teen’s budget on a monthly basis, and make adjustments as necessary so you’re always on the same page for spending.
Prepaid debit cards can act as training wheels for future credit card use. Even though they’re not borrowed money, your teen still needs to be careful with a prepaid debit card. Learning about fees and maxing out credit limits can teach valuable lessons about credit, so make sure your teen develops a healthy respect for the almighty plastic.
Would you give your teen a prepaid debit card?