credit & debt

Why I Don't Like Prepaid Cards for Kids

The Kardashian Kard aimed at teens was quickly pulled off the market because of its high fees. Other prepaid cards aren't a good idea, either.

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.

Most Popular

Top Bear Market Tips from 10 Financial Advisers
investing

Top Bear Market Tips from 10 Financial Advisers

When a bull market turns into a bear market, it can be hard to know what to do. Take comfort in the guidance of 10 financial professionals.
June 30, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 15 Best Growth Stocks for the Rest of 2022
growth stocks

The 15 Best Growth Stocks for the Rest of 2022

A sharp selloff in growth stocks this year creates opportunity for keen investors. Here are 15 top-rated picks to consider in the second half of 2022.
June 28, 2022

Recommended

Financial Advice from America’s Founding Fathers
credit & debt

Financial Advice from America’s Founding Fathers

What money-management guidance can we glean from the words — and experience — of Benjamin Franklin, Thomas Jefferson, Alexander Hamilton and others?
June 30, 2022
When Will Student Loans Be Forgiven?
Paying for College

When Will Student Loans Be Forgiven?

Millions of Americans are waiting for the Biden Administration’s next hint, which could come later this summer, at how he’ll address the student loan …
June 27, 2022
Strategies to Pay Down Your Credit Card Debt
Making Your Money Last

Strategies to Pay Down Your Credit Card Debt

Consider these smart strategies to eliminate or reduce what you owe.
June 17, 2022
Should I Use Credit Card Portals to Book Travel?
credit cards

Should I Use Credit Card Portals to Book Travel?

Your credit card company wants to play travel agent, too. But there are some caveats to consider when booking through a credit card's travel portal.
May 26, 2022