Parents who are looking to teach their kids how to use plastic in a relatively low-risk way may want to opt for a prepaid card over a debit or credit card. And if you're someone who struggles to spend within your budget, a prepaid card can help you learn how to manage money.
Prepaid cards provide a relatively simple way to pay for purchases without taking out a line of credit or using a bank account. And they pose less risk since you have to load money onto the card in order to use it — perfect if you're worried about overspending or misplacing your credit card and giving fraudsters access to your credit limit.
While prepaid cards are an alternative to bank account linked debit cards, they have limitations, especially if you want to build credit. If you plan on establishing a credit history, opt for a credit card instead.
Here’s an overview of what a prepaid card is and why you may want to get one.
You can often find prepaid cards at checkout lanes when you’re at the supermarket, typically next to gift cards. Similar to a gift card, you add value to the prepaid card before you can use it, which is essentially like prepaying for future purchases.
You can load money onto your prepaid card in a variety of ways, including: direct deposit, cash at the register at participating retailers, transfer from checking or savings accounts and checks using the mobile app.
Prepaid cards can be used to make purchases and pay bills, just like debit or credit cards. They are accepted nearly everywhere since they are often backed by a major card network, such as Visa, Mastercard or American Express.
The main disadvantage of using a prepaid card is that you can only complete transactions up to the amount you have loaded onto it. If you add $150 to your prepaid debit card, you can only spend up to $150. Any purchases you attempt to make exceeding $150 will be declined until you load more money onto your card.
Similar to credit and debit cards, prepaid cards charge a variety of fees. You can expect to incur a card opening fee, monthly usage fee, ATM fee, reload fee and foreign transaction fee with many prepaid cards.
The PayPal Prepaid Mastercard® can cost up to $4.95 to purchase the card ($0 if you get the card online) and charges you $4.95 a month to use the card. You may also incur ATM withdrawal fees of $2.50, check deposit fees ranging from $0 to 5% of the total check amount and a 4% fee on purchases made outside the U.S.
That said, there are prepaid cards that have minimal fees, such as Bluebird by American Express. Bluebird has no card opening fee when you open an account online (otherwise it costs up to $5), no monthly fee and no foreign transaction fee.
Prepaid cards can be a good option for parents who want to give their kid(s) spending money without handing them cash that they can easily lose and not get back (whereas you can request a new prepaid card if it's lost). And since debit or credit cards can cost more if they overspend, financially and in terms of damaging your credit (for credit cards only), a prepaid card can be a safer bet.
Bluebird by American Express even has family accounts, so you, as the primary account holder, can set limits on how much your kid(s) can spend and withdraw from ATMs.
Opting for a prepaid card can even be an option for you if you have a history of overspending. Other forms of plastic, like debit or credit cards, can make it easy to spend more than your budget allows and charge overdraft fees. A prepaid card forces you to stick to a budget by declining purchases that exceed the balance in your account.
Once you and/or your kid(s) get the hang of using a prepaid card, the next step is to opt for a debit and/or credit card. In order to get a debit card, you’ll need to open a checking account. There are several no-fee checking accounts that let you bank without monthly fees, like the Capital One 360 Checking Account.
When it comes to opening a bank account for your kid, you’ll likely need to be the primary account holder until they reach 18, then sign the account over to them.
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If you want to build credit — which is key to qualifying for a mortgage, auto loan and other financial products — consider opening a credit card. Secured cards are the best bet for credit newbies and often require a minimum $200 security deposit for an equivalent $200 credit limit, like the Discover it® Secured. Through on-time payments and responsible spending, you can establish a credit score and be on your way to an unsecured, traditional credit card with a revolving line of credit.
Learn more about how secured cards work.
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You can even add your kid as an authorized user on your credit account, allowing them to piggyback off of your credit history. If you pay on time and in full every billing cycle, you can both establish a good credit score. The age requirement for adding authorized users varies by card issuer, but many like Citi and Chase have no minimum age requirement, while others like American Express start at 13.