Give teens bank accounts, not prepaid cards

By Felix Salmon
November 12, 2010
Dan Kadlec is right to give short shrift to the horribly misconceived Kardashian Kard, a prepaid debit card aimed at teenagers. But I think he’s too kind about prepaid debit cards in general:

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Dan Kadlec is right to give short shrift to the horribly misconceived Kardashian Kard, a prepaid debit card aimed at teenagers. But I think he’s too kind about prepaid debit cards in general:

There is nothing wrong with a pre-paid debit card for young people. Pre-paid cards have a lot of advantages:

* Kids can use a pre-paid card to shop online.

* Parents get a detailed spending report.

* Over drafting is not a risk.

* Pre-paid cards are easy to re-load and thus are good vehicles for paying allowance, assuming no or low re-load fees.

* Kids become familiar with plastic in a controlled environment.

* In some cases, your child begins to build a credit score.

Dan links to a piece by Beverly Herzog explaining why debit cards can be a better idea than credit cards. Which is all well and good — but the thing I don’t understand is why no one seems to be screaming from the rooftops that no standalone card offers the flexibility and convenience of a good old-fashioned bank account.

Every kid should have a bank account, with a debit card, but without overdraft protection; something like the USAA Teen Checking account is perfect. Given that it’s just as easy to take out cash at an ATM with a prepaid debit card as it is with a normal debit card linked to a bank account, I can’t think of any good reason why a parent would opt for the prepaid debit card. Prepaid debit cards are expensive (although there are some which aren’t as expensive as the Kardashian Kard, it’s true); they don’t have branches; it’s hard to deposit checks from relatives into them; they don’t pay any interest on savings balances; and, most importantly, they don’t give teens a safe way to get used to how bank accounts work.

The main danger with a teen checking account is that the kid will bounce checks and run up NSF fees — but frankly there’s no reason why the kid should ever have a checkbook in the first place. Checks have about as much relevance to kids as do floppy disks, and the only people who might want to see them are nostalgic parents who associate financial literacy with the bizarre ritual known as “balancing your checkbook.”

We’ve already been greatly harmed, as a nation, by the move from personal loans to credit cards. Let’s be on the lookout for a similar move from checking accounts to prepaid debit cards. No good can come from that, beyond excessive fees and an uptick in egregious celebrity endorsements.


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Outstanding post…

We would be a stronger nation if there was a strong personal finance requirement to earn a high-school deploma or GED.

Anyone buying financial services from the Kardashian girls is getting LESS than they paid for!

You frequently suggest credit unions as a good starting point for some fairly priced alterntives.

As a community banker myself I would advocate a mutual community bank… very much like credit unions in all respects but we pay federal income taxes too!

Posted by y2kurtus | Report as abusive

This is a good idea all around but a point of clarification:

It is actually possible to overdraw an account with a debit card. Depending on the merchant, charges may not be posted immediately, especially on weekends. So one can use the card several times in a day, overdraw the account, and not feel the consequences until the charges post later. I don’t know of any easy way around this, unless you use non-debit ATM cards (i.e. the kind without credit card logos.)

Of course, overdrawing one’s account and paying the fees (which are often lower for debit overdrafts than for actual checks) could be an important piece of financial education. Namely: spending money you don’t have costs more than spending money you do.

Posted by axoplasm | Report as abusive

Some (not all) teen-optimized prepaid cards have something most checking accounts don’t have: two separate account accesses for the teen and the parent, with different privileges.
The parent can see the transactions, replace a lost card, add money or suspend access if school grades are not good enough.
The teen can see the transactions, and add his/her own money.
[Disclosure: my own company manages such cards under the UPside Visa brand]

By contrast, the overwhelming majority of banks provide a single online access to a checking account, with no ability to share through some hierarchy.
So either a parent keeps the access to himself/herself without delegating any access to the teen. Or the parent relinquishes access to the teen entirely.
Not the best way to implement a gradual transition of responsibility.

Evidently, teen cards pushed by shopaholic celebs are a terrible idea.
Responsible spending at no or little fees, with the right prepaid card, can do more than a checking account, with no overdraft risk and no minimum balance.

Posted by PatricePeyret | Report as abusive

Axoplasm: not sure about the US, but in the UK and Australia there are debit cards that can only be used for electronic point-of-sale transactions, that verify balance in real time and can’t go overdrawn ( “all authorised” debit cards) – these are the ones that are offered to under-18s and adults with very poor credit histories.

Posted by johnband | Report as abusive

Sorry, that was unclear – these are *bank account* debit cards, not prepaid ones.

Posted by johnband | Report as abusive

Prepaid debit cards offer the same convenience and flexibility, if not more, than a checking account. Just like a debit card, prepaid cards are accepted ANYWHERE the card’s brand (Visa, MC, Discover or AmEx)are accepted. Teens can use them to pay bills and buy things online and virtually all the cards offer free access to card balances and transactions online or through text alerts.

Funds can be loaded onto the cards online or at 200,000 retail locations nationwide. There are many low cost cards available and most will waive fees if funds are directly deposited to the cards each month. Funds will also be replaced if the cards are lost or stolen.

Contrary to your assertion, prepaid cards like NetSpend offers a savings account, paying 5% interest. Finally, free checking is going to become a thing of the past as banks have announced due to new laws prohibiting overdraft fees they will start charging monthly fees of $8 or more. If “there is no reason why a kid should have a checkbook . . .because he will bounce checks,” it seems prepaid cards which can be used anywhere are the way to go.

I wouldn’t recommend a high fee, celebrity status card like the Kardashian Kard or Rush Card there are other great options like American Express Pass, Walmart Money Card and more.

Crystal Wright, Network Branded Prepaid Card Assoc.

Posted by BakerWright | Report as abusive

There’s nothing inherently evil about credit and debit cards, and they can actually IMPROVE household accounting and budgeting practices if handled properly. My wallet doesn’t offer me a monthly itemized accounting of my cash purchases, however all credit card purchases get tracked in Quicken.

The danger comes when they are used in the absence of sound budgeting practices. I don’t know why so many people succumb to that kind of laziness, but it seems to be quite common for people to spend to their limit without any sense of what they can afford to pay at the end of the month.

Posted by TFF | Report as abusive

Hello, Felix, this comment is in related indirectly to this post. I was trying to send you an e-mail but couldn’t find your e-mail address anywhere on the page.

I’ve been reading your page for more than a year and remember clearly your posts about the future of the checking account once the banking regulations kicked in.
Today I find out that my bank hit me with two fees that up to this point were unknown to me: once is:

DEBIT OF ATM WITH FLAT FEE $10.00, I don’t understand this one, ten dollars for what?

DEBIT OF BASIC CK MAINT FEE $5, A maintenance fee I thought this one was charged at the beginning of the year, but who knows how many times they’ll do it.

So with all these little games banks are playing with checking accounts, do you think it’d be a great idea to open accounts for our kids, under this insane conditions where you are bombarded with fees whenever they please.

I believe that another regulation on the workarounds of the previous regulation is necessary.

Posted by Engels | Report as abusive

I recently checked out bank accounts for my teen son. We didn’t want him to attach him to our account or our credit card from reasons i am sure i don’t need to explain. Most banks cant earn fees like they used to because of some new law so the checking accounts we looked at for him were really expensive and most wanted to attach them to our account, including a debit card. Bank of America wanted $14.95 per month for a student checking account if it had less than $1500 in it. My god..who puts that amount into a 15 year olds account.

Anyway we looked at prepaid cards like the ones from VISA and MasterCard and AMEX. We found the MYPLASH one to be the one with the best and lowest fees and our son liked it.

We feel good about the prepaid thing because he can use the card online and its not attached to our bank account or our credit card, plus it was easy to get it reloaded. My Husband is a CFO and he ran the numbers against a checking accounts and other prepaid cards and still prepaid was cheaper in the long run. Thats my 2 cents. We got a prepaid for our teen and it works just like we wanted it to. The only thing you have to look out for is the fees. we compared a lot of cards and the Myplash card had the lowest by far and even tells the teens how to avoid 99% of them.

We are a fan of prepaid

Posted by KDC1 | Report as abusive

I agree with the article completely — I looked into a bunch of different teen bank accounts, including pre-paid cards, and decided to open a MONEY account with ING Direct instead. No fees or minimums. Also think it’s great that they’re making financial aspects cool for teens with a Facebook page and sweepstakes.

Definitely worth checking out, great option for teen banking!

Posted by Amandy998 | Report as abusive