Here at NerdWallet, we talk a lot about teaching kids and teens how to use credit responsibly. It’s critical to establish good spending habits early in life, along with understanding how to create and manage a budget. As adults, we lead by example. However, rather than risk either your or your child’s good credit by getting a credit card too early, the prepaid debit card can be a better first step. Here’s why.
Prepaid: A credit card with training wheels
There are certain risks with getting a teenager a credit card. Whether you add your child as an authorized user or get them their own card, their credit is now at risk and yours may be as well. If your teen overspends, if they fail to make a payment, if you fail to make a payment – any number of scenarios could result in harming your credit or that of your child’s before they even get out of the gate.
The prepaid debit card is a bit like a credit card with training wheels. Most prepaid debit cards cannot be overdrawn, so you are able to load a certain amount of money on it, and – in conjunction with a budget – your teen can learn how to spend that money responsibly. There’s no risk of overspending. They can follow a budget that they have crafted themselves, and adjust that budget accordingly based on their spending.
It allows you to increase or decrease the amount you load on the card each month. depending on how responsible they are in its usage. Even better, they can load it with their own money.
Prepaid cards offer psychological benefits
There’s a psychological value in being able to slap down Ye Olde Plastic, just as they would if they were using a credit card, but with a built-in spending cap. They’ll learn that funds are actually being depleted on each use, and not that the charge just goes onto a card and they never see the actual effects until the statement arrives.
There are other benefits. It’s a great way to pay an allowance. You can add it electronically, instead of loading their piggy bank. It also removes the danger of carrying cash for your teen. The card can get stolen, but the cash won’t!
There is also another learning tool using prepaid debit cards. It’s a great way for your teen to learn about fees. Prepaid debit cards have fees, but sometimes their disclosure isn’t too great, forcing you to hunt down the exact costs. This is great training for hidden fees at banks and with credit cards. This is where Nerdwallet’s comparison tool comes in handy.
Get started with a financial education
Prepaid debit cards offer a great first step in teaching teens about finance. They open up a discussion about using them versus having a bank account versus a credit card. It allows you to demonstrate that credit and debit card companies are not your child’s best buddy – they are out for the fees. That’s why the comparison tool is so great. Let your teen examine it by herself. See what conclusion she comes to about the best card, and see how it compares with your own conclusion.
Communication is essential anyway between parents and teens. Financial education often is not taught in school, so it is up to you to instill your teen with good values and responsibility with finance. Every lesson you offer now will serve them well in the future.