Debit Cards for Teens: Be Responsible. Don’t Go Prepaid.

Parents don’t want to send their teenagers unprepared into the wide world of personal finance, slapping a credit card into their hands and watching them ruin their credit scores before they turn 18. Many responsible parents give their responsible teenagers plastic with training wheels: a debit card. But despite the profusion of debit cards for teenagers, prepaid debit cards are almost never a good financial decision. Demonstrate good money sense to your kids: read the terms, shop around, and at the end of the day, choose a regular checking account and ATM card over a teenage prepaid debit card.

Tales my bankers told me

Three of the four card networks – Visa, MasterCard, and American Express – offer a prepaid debit card aimed at financial fledglings (Discover killed its Current card this year), supported by any number of banks. They sell themselves on responsibility, safety and security:

“There’s no risk of overdraft fees for your teen, and PASS can’t impact your teen’s credit.” – PASS from American Express 

“Specially designed to offer teens spending independence and responsibility.” – Visa Buxx

“Gives you an opportunity to teach your teen financial independence with a safe, convenient, risk-free alternative to cash…no overdraft fees, no credit risks, and best of all – no more handing over your credit card.” – BillMyParent$ (from MasterCard)

Terrified that giving their teens any other option of payment, be it credit or debit, will lead to identity theft, mountains of debt and an irrevocably damaged credit history, parents might well believe a prepaid debit card’s fees are worth the security and control.They’re not. If the prepaid debit cards’ testimonials were completely open with you, they’d note that regular checking accounts come with overdraft protection, can have no negative impact on a teen’s credit score, and are (still) mostly free. The sites would then go on to say that prepaid debit cards, on the other hand, are riddled with fees, both upfront and hidden: reloading fees, annual fees, monthly fees…not exactly free checking.

Avoid prepaid debit cards, no matter how old (or young) you are

Let’s repeat the benefits touted by prepaid debit card sellers: no overdrafts, no effect on credit score, easy to reload, easy to access and track, protection against emergencies.

Overdrafts. These used to be a problem: a consumer could spend 50 cents more than he had, and incur huge fines. But after the Credit CARD Act of 2009, consumers have to opt in to every overdraft purchase: they’re explicitly told that their sixth of a latte will cost them $35. Overnight, overdrafts became a non-issue.

Credit scores. Regular, non-prepaid debit cads (such as your basic ATM card) have no effect on a credit score, either. If you’re looking to keep your teenager’s file thin and pristine, don’t worry: Fair Isaac doesn’t care about checking accounts. However, there’s something to be said for beginning to build a credit score while your child’s still at home and you can offer some guidance. The age that a teenager gets his first credit card is highly dependent on his own sense of maturity and responsibility, and some won’t be able to handle a student credit card until they’re in college. However, if building credit for your child is a priority for you, they could benefit from a credit card with a low limit, cosigned by you, as they begin to establish a pattern of on-time payments. In either case, prepaid debit cards are sub-par choices.

Ease of use. The prepaid debit card may be easy to reload: many allow parents to set up monthly automatic allowances, or to reload online. But they charge for the privilege: BillMyParent$ wants $1.75 for every one-time load from a bank account, $1.50 for an automatic monthly reload, and $2.95 to reload by credit card (check out our fee table at the bottom for a complete list of charges). How much does the Wells Fargo Teen Checking account charge? $0. Checking accounts also offer online statements and monitoring, fraud protection and FDIC insurance, absolutely free of charge.

Protection. The American Express PASS card offers some perks: roadside assistance (a number to call if you have car trouble – they won’t actually pay for any of the services they refer you to) and global assistance (same principle – it’s a referral service, not insurance). However, before you determine that these goodies are worthwhile, ask yourself how many times you’ve used travel and global assistance (most rewards and premium credit cards have them). Furthermore, ask yourself this: if your teenager ran out of gas on the highway, or lost his passport while travelling alone in Canada, would you want them to call a hotline, or you?

Debit cards for teenagers don’t have to cost an arm and a leg

If your kid’s not quite ready for a credit card, just give her a standard checking account. Many banks offer teen or youth checking accounts with added parental oversight, daily limits and statements that are sent to both the child and the parent. They offer the same level of parental control, the same ease of depositing, withdrawing and spending money, and none of the exorbitant fees. We’d recommend the Wells Fargo Teen Checking account, which comes with a savings account. It offers financial literacy tools; text message/email/online account alerts, online banking, and free ATM withdrawals. For parents, the account offers online access, online money transfers and daily spending and withdrawal limits.

Turn prepaid debit cards into a conversation on financial street smarts

Prepaid debit cards are incredibly popular, despite the fact that they’re basically just expensive ATM cards. This is an excellent time to explain to your teen that any offer should be met with suspicion and solidly researched before it’s accepted. Start by showing her the website for a prepaid debit card. Explain how the site tries to sell its product: security, ease, perks. Mention how prepaid debit cards are compared to cash (unsafe and unwieldy) and credit cards (potentially damaging) but not to their true counterparts, regular debit cards. Then, ask her to compare prepaid and regular debit cards. Wait for her to come back with her research. She’ll ask something like, “mum, Dad, why do people use prepaid debit cards when they can get the same thing for cheaper?” Have an answer ready. Teach your kid financial responsibility, and remind them that the first offer they see isn’t always the best. Then sign them up for a checking account.

Fee Schedules

Check out the fee disclosures for the prepaid debit cards, and be sure you understand all of them before making a decision.

PASS from American Express

Visa Buxx