A recent trend has been for parents to get their kids prepaid debit cards. While this may seem like a logical thing to do, there are some major hidden pitfalls in doing so that you should know about.
1st problem: they may not actually be free!
As you can probably guess, most prepaid debit cards have fees… and a lot of them! Activation fees, cash withdrawal fees, monthly fees, and the list goes on. But are there any that are free? Not quite.
You see, most of the “free” prepaid debit cards require a minimum reload amount each month (for example, you might have to add $500 or more every month for it to be free). While that might work for an adult’s spending, as you can see the idea of getting free prepaid debit cards for kids won’t quite work, unless you spoil your kid and he’s a big spender!
2nd problem: prepaid debit is much more risky than credit cards
Another thing to consider when it comes to prepaid debit cards for minors is what will happen if they lose the card? Or worse yet, what if your kid says he lost the card when in reality he used the money for something he doesn’t want you to know about?
With a credit card, federal law limits liability on fraudulent transactions if you lose your card. By law the most the cardholder can be held liable for is the first $50 in fraud on an account, but in actuality, that rarely happens… almost every banks nowadays just takes that hit so the cardholder has $0 liability. Unfortunately prepaid debit cards are something totally different.
If your kids’ prepaid debit PIN number was compromised and funds were stolen, you will probably be out of luck. This is a double-edged sword, because even if you decided to deposit $500+ monthly to be eligible for a free account, at the same time you would be facing higher risk with having that much money in the account.
3rd problem: offer little to no monitoring for parents
As a parent, you probably want to keep tabs on exactly where the money is going if you’re providing them the money! Unfortunately even the best prepaid cards might not be able to give you the type of oversight you were expecting.
With credit cards, it’s possible to have highly-itemized transaction information for both the primary account holder as well as any authorized user (like your kid). You’ll be able to see exactly where they’re spending money by both the store and its category. With prepaid debit, all you may be left with is information like “$40 ATM withdrawal” and the date.
What are the best low-cost options for your kid in 2013?
Just about any major credit card on the market will allow you to add an authorized user (often for free) and you will even be able to set a monthly spending limit for them. For example, even if your credit line is $10,000 you can set it so your child can only spend $200. If you would like, you even be able to add your kid’s SS# to your credit card account so it benefits their credit. Yes, believe it or not, that is possible to do even for minors.
So adding your kid as a user on your credit card account is safer, allows for greater oversight and control, and their spending will earn you rewards (if you have a rewards card) making them clearly a better option than getting prepaid debit cards.
But if you still insist on getting your kid a prepaid card, then I would recommend you check out this prepaid card instead. It is not “free” but the fees are reasonable.
Written or last updated November 16, 2013