Why I Don't Like Prepaid Cards for Kids
The Kardashian Kard is history, and good riddance. The reloadable prepaid debit card, aimed at teenage fans of the Kardashian Klan, was launched with great hype on November 9. It immediately came under fire for its over-the-top fees -- $99.95 for 12 months -- and was pulled off the market within weeks.
The K-Kard was an extreme example, but high fees have always been a hallmark of prepaid cards marketed to teens. That’s one reason I’ve never liked the cards, but it’s not the only reason. They’re also marketed as a boon to parents, who can avoid the inconvenience of a cash allowance, and they’re often touted as a tool to help kids learn how to manage their money.
Humbug. I’ve always contended that the real purpose is to get plastic into the hands of kids who are too young for credit cards. And the main lesson that kids learn is that when the money runs out, Mom and Dad can top up the card.
I’m not even persuaded by the argument that prepaid cards let parents keep tabs on how and where their children spend money. One of the financial lessons that young people need to learn is how to make choices. But parents don’t need to know whether their kids choose to eat at McDonald’s or buy a pair of jeans. You certainly don’t want them to purchase things that are inappropriate or illegal. But if you’re worried that they’ll spend money on Internet porn or something else that’s objectionable, they shouldn’t have a card in the first place.
Parents sometimes tell me that reloadable cards can be useful in certain circumstances -- notably, if their kids are traveling and need cash on the road. That can make sense as long as you’re not hit with inactivity fees when the kids return.
In general, though, I’d like to lay out a four-step path to mastering plastic that sidesteps prepaid cards:
Step 1: Start with cash. For kids of all ages (and even adults), there’s no better way to learn the true cost of any item than by paying cash. Back in the day of the credit bubble, this notion was considered so old-fashioned -- sort of like buying on layaway.
Now that frugality is again in vogue -- as are layaway plans -- the virtues of hard currency are being rediscovered: No annual fees. No interest or overdraft charges. And cash is a great budgeting tool: Once you’ve spent the money, it’s gone. If you run out of cash in a store, you might actually have to put something back.
Step 2: Get an ATM card. If your teens have learned to manage cash but are still too young for a checking account with a real debit card, you can arrange for them to carry an ATM card. They won’t be able to make store purchases, but they can access to a savings account that includes gift money or earnings from a job. That’s how my son managed his money throughout high school.
Step 3: Open a checking account with a real debit card. This is appropriate for older teens and college students, and the account should be funded with their own money, not yours. Debit cards aren’t perfect: They don’t always have as many protections as credit cards when you make purchases (see Battle Royal: Credit vs. Debit), and there is a danger you could overdraw the account (see Overcoming Overdrafts). But those disadvantages can be addressed by using the card judiciously (another money skill kids need to learn), and they pale in comparison to the risks of giving kids a credit card too soon.
Step 4: Apply for a credit card. Young people under the age of 21 generally can’t get a credit card unless it’s co-signed by someone 21 or older, usually a parent. I’d recommend that you not sign at least until your child has proved that he’s mature enough to manage and balance a checking account. And even then it often pays to wait until he’s 21 and can apply for a credit card on his own.