Prepaid debit cards have grown in popularity over the years and not just among adults. A fairly new niche in the industry involves cards specifically targeting teens and pre-teens.
I’m old enough to remember when consumer advocates like me were very cautious in recommending any teen using ANY form of plastic (debit and credit cards alike). The thinking among financial literacy advocates made sense at the time- teach teens how to responsibly use “cold cash” for a few years before they “graduated” to their first card in college or soon thereafter.
I still think this line of thinking has merit, but I also know that personal finances have evolved over the past several years and technology has advanced rapidly. While things change rapidly in our society, one thing hasn’t: Teens still need positive parental involvement in their finances.
I also know that plastic is here to stay no matter what anyone’s opinion is. In a 2020 study called the Diary of Consumer Payment Choice, the Federal Reserve found that debit cards remain the most widely used form of payment with consumers making 28% of their payments with debit cards, followed by 27% with credit cards. Finally, 19% of payments are still made in cash.
Given these insights, my dilemma as a parent (I have three teen daughters) becomes do I “stick my head in the sand” and ignore the plastic in modern personal finances? Or do I try to embrace them and promote responsible card spending while I have a chance to influence my teen(s)? I, along with millions of parents and teens/pre-teens have decided to take the proactive approach- the popular CardNamediscontinued alone boasts having over 5 million customers.
“Leading by example is the way we teach our children all things, so why not with money?” Jessica Cultra, mom of two and a self-described personal finance publicist, adds. “Our kids see us using cards for every purchase so it naturally makes sense to engage them in the same practices. A prepaid debit card with rewards for chores and spending tracking provides those teachable moments when learning about budgeting and spending behavior.”
What is a prepaid teen/pre-teen debit card?
Teen debit cards are similar to Visa gift cards and traditional debit cards, but they often include additional features and tools geared toward helping teens learn money management skills and their parents easily monitor their spending and accounts.
There are some other differences between prepaid cards and traditional credit cards as well, including:
- Traditional debit cards are typically funded directly from your checking account each time you make a purchase.
- With prepaid cards you are spending money that you placed in the prepaid account in advance (hence the word prepaid!). This process of adding funds in advance is sometimes referred to as “loading money onto your prepaid card.”
- Prepaid cards typically do have monthly fees, but don’t usually have overdraft fees like many debit cards.
- Neither type require a credit check, however neither help you build credit like credit cards do.
Longtime personal finance journalist Donna Freedman, author of the “Your Playbook for Tough Times” books, favors using prepaid cards over standard debit cards.
“Although I wince at any possible fees… I think a prepaid option is better because it has strictly defined limits,” Freedman explains. “No chance for a teen to think, ‘This thing I want costs $25 more than I have left this week, so I’ll just borrow from next week’s money.’ With a prepaid card, you get what you get; with a regular debit, you might have access to more than you should be spending [in the form of] overdraft protection that usually comes with steep fees.”
Prepaid cards for teens have many of the same features of any other prepaid card with some notable differences (account features and benefits vary by card issuer):
- The accounts, sometimes called family accounts, are managed by a parent or guardian that allows the adult to control and monitor, including setting spending parameters and approving purchases.
- Parents can normally add funds instantly right from an app where they can see exactly how much is in any of their kid(s) accounts in real-time.
- Parents can turn the card on or off through the app at any time (a great security feature), receive text alerts related to account activity, and set store-level spending controls.
- Parents can automate allowance payments and help manage their “dreaded chore list,” which includes rewarding chores when completed.
- Some cards also allow kids to set certain savings goals. They can transfer what they want to save on a regular basis and then see how close they are to reaching a particular savings goal. Parents can even reward their good money habits with bonus payments.
- In-app learning modules allow kids and teens to gain life skills and learn about investing, credit and other personal finance topics.
- Cards normally allow relatives and friends to give directly to the card for birthdays, Christmas, etc.
Some cards that charge a monthly fee offer free trial periods (30 days free for example) so you can see if their card is a good fit without having to pay a dime. There are at least two cards that don’t charge a monthly fee, Copper and Till, but the benefits and number of reviews of these cards are more limited.
How can prepaid cards teach teens money management?
Parents that hear about these cards are understandably skeptical at first, especially considering that most cards do charge a monthly fee, generally in the $5-$15 range depending on how many kids you have and benefit level you choose. I was skeptical as well when I first heard about them, despite the fact that I’ve covered the prepaid card industry for many years. The good news is that, if you are on the fence, you can take comfort in knowing that these cards have been around for years and have a proven track record.
Bill Dwight, a dad and personal finance advocate I’ve known for many years, was looking for a better way to teach his own kids budgeting and to streamline paying allowances. He got frustrated with his limited options, including cumbersome spreadsheets.
In the summer of 2006, his solution to this dilemma was to launch the FamZoo prepaid card/app as a way to combine and share three of his greatest personal passions: building software, raising children and promoting the importance of learning from strong role models. Dwight has been a strong advocate for personal financial literacy among kids ever since and FamZoo has grown in popularity over the years based on the simple philosophy of believing that a parent is a child’s best mentor.
Cultra echoes this mission and adds, “Prepaid cards are especially helpful in the preteen and teenage years when trial by error is necessary for teaching and training. So my advice to all parents is to teach as you go,” Cultra continues. “Equip your kids with a card and have them use it independently.
“Let them make some money mistakes, blow their budget, get declined while at checkout, etc! Don’t bail them out. They will live without that candy or Nike shoes. Then, use those moments to teach them at home in a safe environment where they will learn to do better next time. Prepaid cards are one way to provide safety, security and less risk with money mistakes.”
Evidence about the effectiveness of prepaid cards can be seen in hundreds of testimonies from parents. One glaring example comes from Eric Beskid, who used the FamZoo card for years.
“FamZoo was perfect for our family,” Beskid said when I asked him about his experience. “We have boy/girl twins. We came to a point where they needed to deal with money in an easy, yet flexible way. FamZoo gave us that. From paying for and incentivizing chores, to learning how to save money. The cards were super helpful when they started driving and needed a way to pay for gas at the pump instead of having cash on them.
“We could also have them pick up groceries for the family while they were out and easily reimburse them with a single click. They could take out a ‘loan’ for an expensive purchase and pay us back with ‘a smidge of interest’ just to educate them on borrowing. I was able to promote saving by offering my own custom interest rate on whatever portion of their paycheck they wanted to stash away.
“Even in the early years at college when they are not old enough to have their own credit card but needed a way to buy things or just to have a safety net, it was the perfect vehicle. I could transfer money between accounts and reimburse on all or a portion of a purchase from miles away. It was fantastic!
“Now that they are over 21 and can have (and pay for) their own card and build their own credit, the lessons they learned using FamZoo are ingrained in the way to work with and view money. It has taught them valuable lifelong skills.”
GoHenry, another card issuer, surveyed parents who have their prepaid card regarding this topic. Ninety-two percent of parents say their kids are more money confident as a result of using a prepaid card.
Freedman also likes prepaid cards as teaching tools. However, she adds a humorous, but noteworthy caveat.
“Prepaid cards can be a good tool but only if parents attach the caveat, ‘This is all you have to spend for the week/month. Don’t even think of asking for an advance on next week’s allowance. If you splurge on something and don’t have enough to pay for the week’s lunches or gas for your car, well, that’s on you. Peanut butter’s in the cupboard, jelly’s in the fridge, bread’s in the breadbox and the school bus stops on the corner at 7:15 a.m.’” she says. “Without real consequences for overspending, the card will feel like ‘Free money, woohoo!’”
Are you a parent or caregiver looking for free personal finance resources to help inspire your kiddos? Not sure where to start? Check out the Jump$tart Financial Literacy Clearinghouse, a wonderful online tool to easily search tons of prescreened resources.
Teen prepaid cards can put paying allowances on auto-pilot
One of the main advantages touted by card issuers is that parents can “automate” paying allowances. Any parent, including myself, that has tried to set up a system for paying allowances for chores, etc., knows first-hand that the process can be burdensome.
Most financial experts agree that allowances can be very effective at helping kids with money management and also powerful motivators. The challenge is implementing a system that is effective and not time consuming. The good news is that prepaid cards offer a proven solution that many parents love.
While such a hands-off solution may sound appealing, Freedman warns that allowances set up through a prepaid card app, “must be attached to real-world consequences. A teen who learns they can wheedle an advance on next week’s allowance because they used money unwisely isn’t learning smart money management,” she cautions. “But if they know that the money will hit their cards at 10 a.m. Monday and not a moment sooner – no exceptions allowed! – then they will have to get a handle on their spending and hopefully realize they need to create budgets just like their parents do.
“Put another way: As an adult, they’ll find out that their future boss isn’t going to advance them their salary because they spent too much money that week. Weighing your choices is what my dad used to call ‘a useful life skill’.”
Most cards allow you to easily set up weekly transfers for allowances and to set savings goals. You can also set tasks (aka chores) and your kids will get paid when finished. Cha-ching!
Prepaid cards for teen/preteens are interesting, and I am beginning to understand their appeal, especially after doing research for this article. So much so, that I’ve decided to get my own 13-year-old daughter one and she’s excited, too! Be sure to comparison shop if you’re considering one and read our CardName which is the biggest player in this space.
However, all parents should realize that these cards are not a totally hands-off solution to teaching our children how to use money wisely. While these cards have a lot of bells and whistles, they are just teaching tools. Simply put, at the end of the day, there is no substitute for taking advantage of HANDS-ON teaching moments whether you decide to get a prepaid card or not.
“I once interviewed money expert Jean Chatzky, who told me she put money into her teens’ accounts to cover their needs/wants – but not ALL of them,” Freedman recalls. “They had to learn to weigh their options: ‘If I go out for pizza with my friends after the movie, then I won’t have quite enough to put gas in my car for the week. Is having a meal out worth me needing to take the bus?’”
Freedman adds, “Your teens may chafe at such limits. But they’re realistic ones. It can help them to weigh choices and consequences, and decide that yep, being able to do an impulsive mani-pedi with your BFF is worth having to pack a lunch for the next few days. Teens might also learn the consequences of “it’s my treat,” such as using their debit card to pay for a temporarily broke friend’s movie ticket and popcorn – and then having that friend drag their feet about repaying. This teaches them that being a big spender can backfire. (Neither a borrower nor a lender be!)”
I sincerely hope these insider tips are helpful to you and would love your feedback on your personal experiences with teen prepaid cards (and prepaid cards in general). Who knows, I may include a tip from you in a future article!