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Should your teen have a prepaid credit card?

Newlywed, new mom and first-time home buyer, Sarah is currently playing out her exciting life in Phoenix, Arizona. She recently gave up her job in finance to stay at home with her baby girl, who between bath time and feeding time, keeps ...

Pros and cons of prepaid cards

Are you considering getting your teen a prepaid credit card? Let’s take a look at the pros and cons to help you decide.

Teen girls shopping online with credit card

A prepaid credit card is similar to a gift card. You deposit money onto the card, and the card is then accepted anywhere that accepts regular credit cards. For example, you can deposit $500 onto the card, and whenever you use the card, that amount is subtracted from your total balance. There are no monthly payments to remember, and the card does not accrue interest like normal credit cards do. That being said, it might be the route you want to go when teaching your teen good money management.

Pros of prepaid credit cards for teens

Develop good money-management skills. Similar to a debit card, a prepaid credit card will teach your teen to manage his or her money. If you load on a set amount each month, it’s up to your teen to make sure the money is rationed out so he or she is not broke by week two.

Control spending. With checking accounts and regular credit cards, you can spend more than you have. Though you will pay a fee, some teens are not concerned with that. Having a prepaid credit card makes it so you cannot spend any more than is on the card.

Easy to use. As a parent, prepaid credit cards are extremely easy to use. You can load money on electronically from your checking account, or you can have a monthly automatic transfer set up. Prepaid credit cards can also be used to book hotels or to rent a car, which requires a credit card on file.

Cons of prepaid credit cards for teens

Won’t help your teen’s credit. Some people assume that because it’s a credit card, that it can help their credit score. Unfortunately, that’s just not the case. Prepaid credit card payments do not get reported to the three main credit bureaus (TransUnion, Experian and Equifax) and will not help build or establish your FICO score.

There are fees associated with the card. All prepaid credit cards come with fees. Fees can range from one-time setup fees to monthly fees to fees from withdrawing money from an ATM. All of the fees come directly out of your balance, which can greatly reduce the amount of money available for spending.

Reloading with cash is difficult. You can reload the prepaid credit card easily online by means of transferring money, but if you have a cash deposit, it can be more of a hassle. With cash deposits, you need to go back to where you purchased the card in order to reload.

The best prepaid credit cards for teens

If you do decide to go with a prepaid credit card for your teen, you’ll want to do your research and go with the most-affordable one for your family. Look for cards with no activation fees, easy deposit options and a rewards or rebates system, if possible.

Good options include the Visa Buxx, where it's super easy to track spending and thus boosts financial responsibility; the UPside Clear from Visa, which is flexible, cheap and convenient for you and your teen; and PASS from American Express, which will replace your funds if the card is lost or stolen.

Whichever method (prepaid card, checking account or student credit card) you decide is right for your teen, discuss finances regularly and openly. A card cannot teach good money habits — only you can. Discuss your options with your teen, and decide what works best for you as a family.

More money management tips

The wealthy are more likely to use coupons, ironically
The biggest financial issues families face
Start young: Teaching teens smart money handling

Photo credit: Fuse/Getty Images
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