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Are Prepaid Debit Cards Good Money Management Tools?

Written by Miranda Marquit on March 5, 2012 in Family Money  |   11 comments

Prepaid debit cards are popular with some parents because such cards provide the experience of paying with plastic without actually borrowing money and without the chance of overdrafting. Prepaid debit cards are touted as valuable aids in teaching teenagers about money management. However, the recent…

Prepaid debit cards are popular with some parents because such cards provide the experience of paying with plastic without actually borrowing money and without the chance of overdrafting. Prepaid debit cards are touted as valuable aids in teaching teenagers about money management. However, the recent furor over some celebrity-endorsed prepaid debit cards has many re-examining their role.

Advantages of prepaid debit cards

Prepaid debit cards do come equipped with some advantages. Parents can easily load a teen’s allowance onto the debit card. Most prepaid debit cards also include a direct deposit option, so a paycheck from a part-time job can be deposited to the card. Some prepaid debit cards even encourage savings.

Prepaid debit cards are easy to use because they are emblazoned with credit card company logos, and they are therefore accepted everywhere credit cards are. Teenagers can learn how to manage small amounts of money before they start handling larger amounts. Encourage your teens to track their spending so that they know how much is left on the card and so that they can develop good habits early on.

Disadvantages of prepaid debit cards

The biggest downside to prepaid debit card usage is all of the fees. Some cards charge more fees than others, but some common fees charged include:

  • Fees to activate or “buy” the card.
  • Fees to reload the card.
  • Fees for monthly maintenance.
  • Fees to use an ATM (including to check the card balance).
  • Fees for access to customer service.
  • Fees attached to paying bills.
  • Fees to withdraw cash.

In some cases, card users may pay anywhere between $30 and $100 a year on fees—just to access their own money. You need to think about what kind of financial lesson you are teaching your child if you use a fee-ridden prepaid debit card as a money management tool.

Learning money management lessons

There are a few prepaid debit cards with much lower fees, and some prepaid debit cards have no fees at all. Teach your child a valuable lesson by having him or her help you comparison shop to look for the best deal. You will save money in fees and your teenager will participate in an important financial exercise.

You may want to start your search at your local bank or credit union. It might have a prepaid debit card geared toward teenage customers, or you can help your child open a checking account and a savings account instead. Depending on state law and the bank in question, you can probably open a joint account with your teenager. In some cases, your teenager might even be able to get a debit card in his or her name (more likely if your child is at least 16).

If you are concerned about overdrafts, you now have the ability to opt out of standard overdraft services. If you do opt out, your teen will be unable to withdraw money from an ATM or complete a purchase, if there isn’t enough money in the shared account to cover the transaction. You can limit some of the ability to overspend while still providing your teen with the means to become used to using plastic as a payment method.

Keep tabs on your teen’s spending. Encourage him or her to track expenses, and regularly review the account statements. Set ground rules and enforce them. In the end, using a joint bank account to teach these lessons—especially since you have access to the account and can monitor it at all times—may be more effective in teaching real world money lessons than a prepaid debit card.

READ MORE:
Steal These Dieting Tips to Trim Your Budget
Give Your Budget A PERK
Saving Money and Setting Financial Goals With Your Children
Saving Money on Auto Insurance

Miranda Marquit is a freelance writer and professional blogger specializing in personal finance, family finance and business topics. She writes for several online and offline publications. Miranda is the co-author of Community 101: How to Grow an Online Community, and the writer behind PlantingMoneySeeds.com.

11 comments

  1. Ilyce Glink, Managing Editor, The Equifax Finance Blog says:

    Stored value cards, which is another name for prepaid debit cards, have become more popular because of their links to well-known celebrities, such as Suze Orman and the Kardashian sisters. While using a stored value or prepaid debit card instead of cash is one way to keep track of your spending, the costs really add up.

    Some of these cards charge $1 per use up to $10 per month. There may also be fees if you try to pay for something and it’s more than the amount you have left on the card.

    I don’t know about you, but paying $100 to $120 per year to use my own money just doesn’t seem like a smart way to go. I’d much rather you open up a checking account and use a regular debit card that acts like a check. The fees should be a lot less.

    Are you using a pre-paid debit card? And if so, why? Please share your story with us on the blog.

    • Art says:

      My wife and I each have a prepaid card. We direct deposit from our paychecks with no charge. We use the cards for personal items such as salons, small purchases, groceries and so on. As long as we direct deposit $500 per month into the card, the fee is only .99 cents per month. In addition, we use the cards quite a bit, so have achieved a ‘platinum’ status and now don’t pay any monthly fee at all.

  2. Prepaid Industry Expert and Financial/Bank Products Expert says:

    A decent blog/article, but you don’t have to have higher than 9th grade math to see that banks charge a heck of a lot more than prepaid cards for its monthly fees. This article and the commenter above are not being truthful. Most prepaid cards are free to get, with most having a monthly fee of $3.95-$4.95 per month to keep your account open. compare that to a bank checking account or student/teen account monthly fee of $9.95-$14.95 from the top major banks which include Bank of America, Chase, Citi and Wells Fargo. Pretty simple math on that alone…prepaid is by far cheaper.

    Also prepaid cards don’t have overdraft which banks make hundreds of millions of dollars from consumers each year. Bank of America even charges a higher monthly fee on the student accounts if you don’t tie the teens account to the parent allowing overdraft.

    Most prepaid cards have the same exact ATM fees as do big bank, so the reality is banks are not cheaper in this instance. As far as loading goes, most if not all prepaid have “free” loading if you do direct deposit from your employer or ACH transfer from a checking account.

    Lastly these products fill an need for those Americans who can not get or do not qualify for a checking or savings account as they are able to get a prepaid card which acts exactly the same as a bank checking/debit account.

    This article and commenter are either (1) clearly being paid by big banks to write untruths “or” (2) are totally uneducated about the what they are talking about and need to do more research. in either case they should not be writing anything pertaining to this subject until they know the facts. Please do consumers a favor and tell the truth maybe do some number comparisons to show consumers rather thank being general. The numbers tell the truth. So be a responsible writer and Managing Editor and tell the real truth.

    • Ilyce Glink, Managing Editor, The Equifax Finance Blog says:

      Thanks for your comment. But I have to disagree about a couple of points.

      While banks do charge fees – and those fees are going up, there are ways to get around most of those fees, if you’re careful about how you spend your money and what kinds of services you’re paying for. If you feel you’re unfairly charged by a bank, there is a road for recourse and often times, banks will unwind fees for good customers.

      Stored value/pre-paid cards are non-negotiable in terms of fees. You’ll pay to carry the card and use the card. You’ll pay to withdraw cash. You don’t get interest on your money, and you don’t help build your credit history. On the plus side, it’s difficult to spend more than you have.

      About that ATM charge – if you’re inside a bank’s network, you don’t pay ATM fees. I use my bank’s network of ATM machines and haven’t paid an ATM charge in years. It’s less likely that that will be the case with a pre-paid debit card.

      There are relatively few people who don’t qualify for a checking or savings account. And, banks are still offering free accounts, though some fees are creeping in there as well. If you have a history of bouncing checks then, yes, you might have trouble getting a checking account. But if you’re an average citizen, even a thin or non-existing credit history shouldn’t preclude you from getting a checking or savings account. There is always a bank or credit union that will want that business.

      To your last point, I want to be clear that the Equifax Finance Blog does not accept money from companies to publish articles that feature a particular point of view. Our blog is entirely editorially independent. Other than the credit blog, which Equifax creates, all of the content on the site is generated by Think Glink Publishing, and its network of contributors.

      Thanks again for your comments.

    • Miranda says:

      Thank you for stopping by. However, I do have to disagree with some of your points. First of all, I was not paid by any bank to write this article. As Ilyce points out, I am paid as a contributor with Think Glink, and I do my own research. As has been pointed out, it is still quite possible to find free checking accounts, and turning down standard overdraft services can eliminate a lot of the problems related to overdrawing the account and racking up the fees — especially in terms of using a regular checking account as a teaching tool for teenagers. While there are, indeed, some in the ranks of the unbanked who can benefit from prepaid cards, I don’t believe that they are the best choice for teaching teens money management when there are other options available, which is what this article is about. With a little shopping around, it is possible to find a free joint checking account that doesn’t charge for use, and that parents can use to help teenagers learn good money management.

  3. Heytonia says:

    I’m pretty lucky! I opened a second checking account and gave my 14yr old daughter, along with a check book register. She’s been a debiting Queen since then with no problems. She’s not like the average 14yr old and I sure am happy about that.

    • EFX Finance Blog Editor, JF says:

      @Heytonia – Sounds like you have a pretty great daughter, and that you’ve been teaching some strong money management skills.

      Thanks for reading, and we hope to see you back on the blog again soon.

  4. Pam Whitlock says:

    I keep going back to Ilyce’s comment: “I don’t know about you, but paying $100 to $120 per year to use my own money just doesn’t seem like a smart way to go.” Kids and teens learn about money management predominantly from their parents. We have to think about the message we are sending when we are paying that much for something that is “cool” or “convenient”. Also, I believe I have read in other places that these cards do nothing to help teens build a credit history. Is that correct?

    • EFX Finance Blog Editor, JF says:

      @Pam – So true. Kids start learning about money from their parents, and teaching them about money management at a young age will only help them for the rest of their life.

      Some prepaid debit cards might linked to a bank account, but most prepaid cards do not show up on your credit report. Another option is to open a secured credit card. Secured cards are guaranteed by a deposit you make with the credit grantor and offer the purchasing power of a major credit card. If the grantor reports payment histories to the three major credit-reporting companies, you are building a positive payment history by using your card.

      Thanks for reading, and make sure to come back to the blog again soon.

      • OKIE says:

        I was recently involved in a car accident that prevents me from working. This has created a terrible blow to my credit history, and I’m unable to obtain a credit card with a low interest rate with no yearly service fee. So I refuse to get a card but when my wife & I travel we usually rent a car. Things are getting better now but before you couldn’t rent a car without a credit card. There still are somethings that you must have a credit card for since debit cards aren’t for whatever reason accepted. I have talked with my bank and discovered that if I were to give them $1,000 I could get a secured credit card with the value of $1,000 with no service fee and a reasonable interest rate.

        • EFX Finance Blog Editor, JF says:

          @OKIE – I’m so sorry to hear about your accident. A secured card is a great way for people with lower credit scores to start to establish a pattern of good payment behaviors and build up your credit. It sounds like you’re on the right track. Best wishes for a speedy recovery.


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