Parents, with the laudable goal of teaching financial responsibility, hand prepaid cards to their kids as a way to encourage restraint while still permitting freedom. And prepaid debit has a lot to recommend it. It's convenient, so kids don't have to fumble for change when buying sarsaparilla from the corner grocery store. It won't give kids access to lines of credit, or saddle them with a bad credit score
before they can drive.
But for all the advantages of prepaid debit cards for kids, parents are almost always better off choosing a regular checking account.We've moved on from piggy banks
Times have changed: back in my day, I was handed a quarter every week, which I kept in a jar, blissfully unaware that the shiny stacks of coins were slowly but surely depreciating. When I was a teenager, I got a Starbucks reloadable card and thought I was hot stuff because I paid for hot cocoa with something that resembled real plastic. I didn't get my first credit card
and start building a credit history until college.
Now, paying for your purchases in cash isn't adorable. It's annoying for everyone in line behind you. And Starbucks cards have started migrated to smartphones, eliminating the need for plastic at all. But most importantly, parents have realized that in order for their children to thrive in the big, scary world of adulthood, they need to be comfortable with credit and debit cards.
Still, prepaid debit cards
are not the best way to go about teaching personal finances best practices.The price of peace of mind
There are a number of prepaid debit cards for teens and kids, with customizable card colors for the youngsters and reassurances for their parents. Three of the four major card networks, MasterCard, Visa and American Express, offer prepaid debit cards specifically aimed at the under-18 crowd. The Current card from Discover ended earlier this year.
Among the positive features listed for each:
- Visa Buxx: "No ordinary debit card. It has been specially designed to offer teens independence and responsibility, while keeping parents informed, involved and in control."
- PASS by American Express: "PASS is prepaid, so teens can only spend what's preloaded on the Card. There is no risk of overdraft fees for your teen and PASS can't impact your teen's credit."
- Allow by MasterCard: "Finally, an allowance card that can make a huge difference…Personalized for your teen but designed with you, the parent, in mind."
Each card has two major selling points: peace of mind for parents and independence for kids. The cards also come with myriad fees and charges--for ATM withdrawals, balance inquiries (which parents should want their kids to do regularly
), reloading, customer support and card activation--in addition to monthly fees.
Let's say little Billy checks his balance and withdraws money from an ATM once every week and that his mother loads $25 onto the card once a week. Every month, the Johnson family would shell out $14 with the Visa Buxx from US Bank ($24 if Mrs. Johnson isn't a US Bank customer
), $14 with the Allow and a relatively mild $9.95 ($6 before October 1st
) with the AmEx PASS.
In addition, Billy's card would come with a one-time activation fee of $10 with the Buxx or $23.90 with the Allow (there's no activation fee with the PASS
). The ongoing monthly costs could easily add up to 10-15% of Billy's allowance. The discrepancy is even higher if Billy has a smaller allowance: if Mrs. Johnson deposits $10 a week, 25-35% of the money will be lost to the bank.
As the argument goes, parents are better off shelling out the fees for a prepaid debit card and avoiding the possibility that their children will lose their cash allowances or recklessly use their credit cards. And the argument has merit: cash is both clunky and prone to disappearing, and credit cards can be too much of a temptation. However, prepaid debit issuers compare their products to credit cards and cold, hard cash. The true comparison is between a prepaid debit card and a regular debit card, a contest that the regular card easily wins.Youth checking: all of the comfort, none of the fees
Fortunately there is a way to encourage independence, allow parental oversight and provide efficiency and protection without the fees of prepaid debit: regular debit cards. Dire media warnings aside, free checking still exists--especially for customers who hold other accounts with the bank. Some are even tied to savings accounts that will become available when the child turns 18.Optional overdraft protection
One oft-mentioned benefit of prepaid debit cards is that, unlike credit cards, kids can't spend money they don't have. Back in the day, a hard-and-fast spending limit served a useful purpose. Overdraft fees on a $3 purchase could add up to more than $30. However, after the Credit CARD Act of 2009
, account holders are required to opt in to over-the-limit withdrawals. This means that every time a teenager wants to withdraw in excess of his balance, he'll have to explicitly consent to the overdraft fee.
Many checking accounts offer optional overdraft protection: an automatic transfer from another account to the checking account with insufficient funds, skirting overdraft fees. A parent could easily refuse overdraft protection, however, ensuring that the child spends only what's on the card.Our favorite teen checking accounts
- Key Bank, Bank of America and Fifth Third Bank offer free checking accounts to students 16 and over, with a few other requirements (BofA requires a driver's license, for example, while Key Bank requires that students be high school juniors or seniors).
- Young Americans Bank offers free checking to youth under 18 with an adult co-signer. In addition, the bank provides financial literacy resources, hosts day-long workshops and even runs personal finance summer camps. Although located in Denver, Young Americans allows anyone under 21 with a social security number to bank with them.
- Wells Fargo Teen Checking is open to youths 13-17 and offers: free ATM withdrawal and deposit, a free debit card, and free direct deposit with no monthly fee. Account holders have access to online financial literacy tools, and can receive account alerts by text message.
- Chase High School Checking offers free checking with a linked parent checking account or direct deposit (otherwise, there's a $6 monthly fee). The account comes with a free debit card, online banking, account alerts and ATM withdrawals and deposits.
How do you handle cultivating your kids' financial independence? Add your suggestions in the comments.
Anisha Sekar is an analyst at NerdWallet, a site dedicated to helping consumers understand credit card offers.