A growing number of prepaid cards are targeting kids and young adults, offering them the grown-up thrill of plastic — and parents the peace of mind of knowing their kids aren’t carrying wads of cash.
But are prepaid cards a good idea for your kids? On one hand, they can be a convenient — and educational — way to store spending money. On the other, fees can make them more expensive than simply handing your children cash.
Prepaid pros and cons
According to proponents, loading all or part of your kids’ spending money on a prepaid card offers convenience and security — if the prepaid card is lost or stolen, the card issuer will usually reload the funds onto a new card, as long as the loss is reported in a timely manner. It can also be a great way to keep an eye on your children’s spending and help them develop good money habits.
At the same time, prepaid cards have earned a reputation for being riddled with numerous confusing fees — ATM fees, reloading fees, monthly fees and card replacement fees. These can quickly make prepaid cards very expensive, particularly for consumers who don’t pay attention to the fees before signing up for a card.
Still, we no longer live in a cash-based world. It is only a matter of time before your kids will be introduced to plastic, and waiting too long can come at a price.
“If you don’t help your kids get experience using plastic, you are depriving them of an important learning experience,” says Sandy Shore, a spokeswoman with credit counseling organization Novadebt. “Kids who don’t get their first experience with plastic until they head off to college and get a credit card often get into trouble, because they have no previous experience using plastic and budgeting for non-discretionary expenses.”
Using a prepaid card as a teaching tool
Prepaid plastic can be a useful tool for parents who want to monitor a child’s spending and teach basic budgeting skills. Teens can spend only the money preloaded on the account, so a prepaid card forces kids to keep track of spending when using plastic.
Shore recommends getting a prepaid card for your children once they are old enough to go to the mall by themselves.
“Set a spending limit for them and put their allowance or part of the allowance on the card,” says Shore. “If they are unable to stick to the spending limit, that is a great occasion to sit down and talk about what happened, and what your child can do in the future to avoid it.”
Start out putting purely discretionary money on the card and, as the child gets older, add the non-discretionary money (like lunch money) as well. That way, your kids will learn to avoid indiscriminate spending when using plastic, a skill much needed once they graduate to credit cards.
The good news is that, although prepaid cards have fees, they don’t have to be expensive. With growing competition, some card issuers have introduced prepaid cards with very few fees.
Here are two prepaid cards that feature fairly low fees and also offer online resources for financial literacy education geared toward kids and teens.
American Express PASS prepaid card: With no monthly fee and no charges to load money (if deposited directly from your bank account), the AmEx PASS card is one of the least expensive prepaid cards for kids out there. Funds can also be added via a MoneyPak purchased at a local retailer.
There is a catch, however. The first ATM withdrawal each month is free. After that, there is a $2 fee per withdrawal, so frequent ATM withdrawals could quickly turn this into a very expensive card. Still, teaching your kid to avoid frequent ATM withdrawals is a lot easier than avoiding all the other fee-incurring actions typically associated with prepaid cards.
Teens can track their purchases online and use the Money 101 online resource center to learn the essentials of budgeting. They can even become “Financially Certified” by passing an assessment test at the Junior Achievement Student Center sponsored by American Express.
Visa Buxx prepaid card: Featuring versions both for tweens and teens, the PayJr Visa Buxx card features money management tools to build financial literacy skills for kids of all ages. Choices include the PayJr Chore & Allowance prepaid card for children under 12, which gives parents and kids access to an online system for tracking chores — and the rewards for completing them. The idea is to help kids create a link between work and financial rewards.
The PayJr Visa Buxx card, meanwhile, targets teens, who can track their spending online and take advantage of financial education resources to learn about budgeting and other money management skills.
These extra services don’t exactly come free: The monthly maintenance fee for the VisaBuxx card is $4.95 per card, ATM withdrawals are $1 per withdrawal (in addition to ATM fees), plus it costs $2.50 to load money from a debit or credit card linked to the prepaid card. If you choose to get a paper statement, that will add another $2 per month.