Are Prepaid Debit Cards Bad for Teens?

Families can help their growing kids get ahead through smart use of debit cards.

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With two teenagers in the house, my wife and I spend a considerable amount of time discussing family finances. And for this reason, a recent article by Sheryl Nance-Nash caught my attention. In the article she argues that prepaid debit cards are a bad idea for teenagers. Our children do not carry a prepaid card, but it’s something I’ve given a lot of thought.

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So we put together a list of factors to consider if you are thinking about a prepaid card for your teenager.

Fees: The fees charged by prepaid cards are probably the single biggest reason to stick with cash. There are some prepaid debit cards with no fees, but only if you use them correctly. They typically require you to load a minimum amount of cash on the card each month (typically $500 or more) or use the card in thirty transactions or more to avoid monthly fees. While these cards may be perfect if you have a full-time job, most teenagers will probably end up paying about $5 a month or more for the card.

Safety: Prepaid cards are certainly safer than cash. My children can’t keep track of their retainers, let alone the money they have stuffed in their pockets or backpacks. Of course, lost money can’t be replaced. A lost prepaid credit card can be canceled and replaced without much hassle. However, some company’s do charge a fee for a replacement card.

Parental Control: The ability to monitor and control your child’s spending is an important factor for many parents. With some cards like the Upside Visa, parents can control online where and when the children spend money. Allowance can be added to the card for free with a transfer from another bank account. And parents can setup e-mail alerts based on card activity. These parental controls are what really distinguish prepaid credit cards for teens from other card options.

Budgeting: Some believe that a prepaid card helps teenagers learn to manage their money. They can monitor their card usage and balance online, and learn to budget their money accordingly. And some cards also offer savings accounts where teens can transfer money from the card to the account to save for future expenses.

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Cash versus Plastic: Another factor to consider is simply whether you want to put plastic in the hands of your children. Many believe, and rightly so, that spending cash is more painful than swiping plastic. When the cash leaves your hand, it hurts a little more than when you pay with a card. Studies also confirm that we spend more money when we use credit cards than when you pay with cash.

College Students: For college students, a prepaid card may be an ideal way for parents to send money. One thing to note, however, is that prepaid cards don’t build credit. So if a college student is looking to build a credit history, a student credit card may be the best option. But putting this issue aside, prepaid cards may be the ideal solution once your teenager heads off to college. As a parent with two children who will graduate high school in the next couple of years, it’s cash for now and a prepaid card once they are in college.

DR is the founder of the popular personal finance blog, the Dough Roller and credit card review site, Credit Card Offers IQ.