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Prepaid cards for teens: Good move or rip-off?

 
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January 18, 2013

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More prepaid card issuers are targeting teens, going all out to attract young customers. The latest? Teen pop superstar Justin Bieber will soon start promoting the SpendSmart card from BillMyParents.

But prepaid cards appeal to teens even without celebrity endorsements, experts say.

“It's certainly popular for kids to have their own prepaid card,” says David Robertson, publisher of the Nilson Report, a newsletter that tracks the card industry. “And it's moving from teens into preteens, too.”

There are several benefits to prepaid cards. For example, they give young cardholders the convenience of having plastic handy to play an online game, order an outfit or pay for a night at the movies. And they also allow parents to monitor and control their child's spending.

“You know there's a limit to how much your kid can spend,” Robertson says. “And the teen doesn't have to keep asking mom for $10 or $12.”

Also, the cards let parents avoid handing over their own credit or debit cards in certain situations — for example, when a parent wants a teen going on a school trip to have a card just in case of an emergency.

“You don't necessarily want to give your kids your own card,” Robertson says. “With a credit card, they could run up a heck of a lot of spending, and with a debit card they can drain your checking account.”

Despite their advantages, are prepaid cards really the best option for teens who are just learning how to manage money? Some experts say no.

Money management tool or rip-off?
Like prepaid cards for adults, the fees are the big downside of prepaid cards aimed at teens.
“The real issue is these costs,” says Greg Meyer, community relations manager for Meriwest Credit Union, who teaches personal finance classes for families.

Here are some common fees for teen prepaid cards (or see our fee comparison chart below):

  • A fee to get the card: “You might have to pay a fee just to get the card mailed to you,” Meyer says. For example, the PAYjr Visa Buxx Card for teens charges a one-time $4.95 enrollment fee. Not all cards charge this fee: For example, the SpendSmart Prepaid MasterCard from BillMyParents, the one Bieber signed on to endorse, charges no enrollment fee. Neither does the MYPLA$H Teen Prepaid MasterCard.
  • A monthly service fee: Monthly fees on teen cards can go up to $5.95 or more, Meyer says. For example, the PAYjr Visa Buxx Card has a monthly service fee of $4.95, while the SpendSmart card charges $3.95. The MYPLA$H card charges $3.95 a month if you load less than $500 per month, or $1.95 if you load more.
  • Reload fees: If you pay junior every time she does the dishes, you could rack up a hefty amount in reload fees, experts say. MYPLA$H charges $2.95 every time you reload the card, unless you do it via bank transfer or direct deposit, both of which are free. PAYjr charges $2.50 for a standard reload from a credit or debit card, in which funds take one business day to appear on the card, or $5.95 for an “emergency reload” with a limit of $100 that will show up on the card in 15 minutes.
  • ATM fees: If your teen uses the card to get cash from an ATM, count on paying for that, too. MYPLA$H charges $1.50, but tips off teens that they can go to a store and purchase a small item, like gum, and ask for cash back to avoid the fee. PASS from American Express, a prepaid card for teens, charges $2 per withdrawal (after one free withdrawal per calendar month).
  • Other fees: The fees don't end there. Also look for replacement card fees, which can set you back $5 to $8 or more if the card is lost or stolen. Other fees might  include refund processing fees, paper statement fees and a fee to check your balance via an ATM. There also might be inactivity fees if the card isn't used for a certain period of time.”Teenagers are going to be making a lot of small transactions, buying a Coke or a bag of chips, and that's how the cards really make their money,” Meyer says, noting that retailers pay a fee to the card issuer for each purchase a customer makes. So, expect to be hit with a charge of up to $3 or more if the card is not being used, he says.

Parents who want their kids to carry plastic, and learn how to use it responsibly, may have less expensive options. The parent can check with local credit unions or their own bank to see if they offer a fee-free debit card product for teens. For example, Meriwest Credit Union offers the FLOW debit card that's attached to a parent's account and allows the parent to control how much the child spends and to get text alerts. Or, parents can just open a joint checking account with their teen.

“If you want to save $120 a year, skip the prepaid card and just go with a checking account,” Meyer says.

Tips for getting a prepaid card for your teen
Parents who do want to go with a prepaid card can use the following expert tips:

1) Hunt for a good deal. The market for teen prepaid cards is getting more competitive, and that means more choices.

“You've really got to shop around – it's amazing how many prepaid cards are out there,” Meyer says.

2)  Enlist your teen to help dig up details. To help your child get a handle on fees, consider assigning him or her to do research, make a spreadsheet of the available teen cards and their costs, and sit down with you to go over it and pick the best deal, Meyer recommends. This is a good way to teach your kid to read the fine print, since many of the fees are spelled out in more detail in the terms and conditions than in the simple charts provided on issuers' websites.

“It will open the kid's eyes to the cost of the card,” Meyer says.

3)  Ignore the marketing. The issuers of prepaid cards geared toward teens definitely know their market — and it's likely that Bieber pulling a SpendSmart card out of the pocket of his jeans pocket might make a girl or two want the card.

“They're not taught to shop around — they see something cool and they buy it,” Meyer says of teens.

That's why parental wisdom must prevail: “You have to look at the cost that's behind the face of the card,” Meyer says.

4) Track your kid's spending. Plastic opens opportunities for teens to buy items mom and dad might not want them to have, or to spend too much at one time. So, take advantage of any features the card offers — for example, the ability to set up alerts to tell you when, where and how much your kid spends, Meyer says.

5) Teach your teen to use plastic responsibly. “Once the money is on there, there is an opportunity to help kids understand a little bit about managing finances and being smart about it,” Robertson says.

Sit down regularly with your teen and look at the purchases that were made and the fees that were charged, he recommends. And don't forget to teach your kid how to use cash responsibly, too.

“Cash is still king,” Meyers says, “And teaching kids to manage it is always a good thing.”

So, still want to sign your teen up for a prepaid card? Use our chart below to find out how much it will cost to get started. We reviewed some of the most popular prepaid cards for teens on the market and calculated the cost of the first month of ownership.

Keep in mind that making ATM withdrawals, making foreign transactions, calling customer service and requesting paper statements may lead to additional fees. Our calculations were made with the assumption that the consumer picks the most basic membership plan (some issuers offer upgraded plans with additional perks and costs) and chooses the most affordable method of loading the card.

Prepaid cards for teens: The start-up costs
Card
Activation/
Enrollment fee
Monthly membership
fee
Loading fee Minimum load amount Total cost, first month (fees + initial load)
PAYjr Visa Buxx card $4.95 Waived first month; after that, $4.95 per month Initial load with activation is free; $2.50 per additional load from debit or credit card. $10 $14.95, assuming no additional loads beyond initial.
American Express PASS None None No fee for loads from bank account or direct deposit. Cannot load via debit or credit card. Cash loads may incur third-party fees. $25 $25, assuming initial load is from bank account or direct deposit.
BillMyParents None $3.95 Initial load is free; $0.75 per additional load from checking account; $2.95 from debit or credit card. $10 $13.95, assuming no loads beyond initial
Visa UPside (Clear Plan, with no ATM access) None None No fee for loads from bank account; $2.50 from credit or debit card, or direct deposit. $25 $25, assuming initial load is from bank account.
MYPLA$H MasterCard None $3.95 for first month. After that, $3.95 if you load less than $500 per month and $1.95 if you load $500 or more. No fee for loads from bank account; $2.95 via debit or credit card. $10 $13.95, assuming initial load is from bank account.
Source: CreditCardGuide.com review of prepaid cards for teens. Information current as of Jan. 18, 2013. Other fees may apply for ATM use, customer service calls and paper statements.

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