Parents, imagine this scenario:
You're at home on a leisurely Saturday afternoon enjoying the peace and quiet of an empty house, when, suddenly, you receive an alert on your smart phone. It's an instant message from your daughter requesting a $100 money transfer -- "Must have clothes for next week," she notes.
Before you know it, your son is requesting money as well. "Dude," he writes (when did he stop calling you Dad?), "need cash 4 new soccer shoes 4 2moro. OK?" Again, a couple of taps and you're done.
Now, where were you? Ah, yes, nap time...
This is not a future reality or a nap-time nightmare. All of this technology exists now -- and is used by people everyday to help manage their finances. Never has it been easier to dole out allowances -- or deplete your checkbook.
In fact, the big banks are betting that this $175 billion youth market can help offset lost profits from the upcoming interchange reform. So they're pushing prepaid debit cards, even going so far as to create one-off microsites, enlist the help of Hollywood celebrities and spend big bucks on advertising campaigns to help sell these financial services to teens (and their parents).
But are prepaid debit cards for kids a good idea? Do they encourage spending or are they an early lesson in the dangers of plastic?
The Advantages of Prepaid Debit Cards
On the plus side, prepaids do offer several benefits for teenagers (and anyone who uses them, for that matter). These advantages include:
- The ability to monitor spending habits through online banking.
- Parental control options for daily spending limits and control over types of purchases (junk food, tobacco products, etc.)
- Users have the option of denying overdraft privileges, which means you can only access the money you've placed on the card, without the dangers of spending beyond your limit or paying excessive fees for overdraft protection.
- Ideal for making purchases over the Internet.
- Good option for traveling, so you don't have to worry about losing your primary debit or credit card.
- It's easy to qualify for a card -- the process is as simple as buying the card at a convenience store or online and activating it. Cards can then be reloaded through online transactions or with cash at an affiliated vendor.
Here’s a list of several popular prepaid debit cards for teenagers, as well as their associated fees (which we'll talk about in the next section):
Cautions and Caveats
When you look at the fine print of prepaid debit cards, you may be inadvertently teaching your kids more than the idea that money does grow on trees. You might also be unsuspecting pawns in the big banks' game of hidden fees because prepaid debit cards are equal opportunity fee chargers to both merchants and users.
Because prepaid cards are exempt from the financial overhaul bill for interchange fee reform, prepaid debit cards offer two major advantages to financial institutions: 1) The issuing banks increase the number of customers from previously overlooked markets, while 2) potentially counterbalancing the upcoming loss of debit card fees due to recent debit card reform.
[For more on interchange fees, visit our InvestingAnswers Feature: Credit or Debit? Your Choice Could Cost You 3%.]
And with little regulation to limit the number of hidden fees associated with prepaid debit cards, there is no limit to the number of charges that can quickly reduce an unsuspecting card user’s cash balance. These charges can include:
- Activation fees ranging from $3.00 to $39.95.
- Monthly fees ranging from $2.95 per month to $9.95 per month.
- Cash withdrawal fees ranging from $0.99 to $2.50 for each withdrawal.
- Balance inquiry fees ranging from $0.45 to $1.00, not including any additional fee charged by the ATM owner.
- Paper statement fees ranging from $1.00 to $10.95.
- Customer service fees ranging from $1.00 to $3.95.
- Inactivity fees ranging from $1.95 to $9.95 per month.
The sheer number of fees on these cards can be a high a price to pay, regardless of their ease-of-use benefits. When you add up the monthly charges, mandatory ATM withdrawals and associated fees, costs for customer service and charges for reloading funds, these convenient little cards could ending up costing you hundreds of dollars over the course of a year.
In the end, the increased use and popularity of prepaid debit cards means more issuers will enter into the market. And with an increase in competition, consumers can expect better deals as fees are drastically reduced to attract customers.
Gone are the days of $99 activation fees, but if you’re considering the route of prepaid debit cards, a little research will go a long way to ensure your account balance isn’t being diminished by excessive fees.
Consumers should also note that while some prepaid debit cards might charge fewer fees than others, it still might be worthwhile to research traditional checking accounts before taking the prepaid debit card plunge. Sometimes the no-frills, non-overdraft checking account with a debit card will still be cheaper than prepaid debit cards.
As for the enforcing the idea that money doesn’t grow on trees, parents are on their own with that one.
[Read more in the InvestingAnswers feature: How to Talk to Your Kids About the Financial Facts of Life.]