The Truth about Pre-paid Credit and Debit Cards
One of the newest trends in personal finance is pre-paid credit and debit cards. The cards surfaced as consumers sought alternatives to traditional credit cards. While the concept of pre-paid cards may be new to some, they are simply a revised version of the old “secured” credit card—a card which required the user to put up a security deposit before being approved for credit.
Today’s pre-paid cards look and act like a traditional credit or debit card, with one primary exception. They are actually “smart cards” and the credit limit on the card is equal to the dollar amount loaded into the account to which it’s tied.
Most of the marketing for pre-paid credit/debit cards targets teenagers and pre-teens. Why? Because teens and pre-teens account for almost $200 million in annual purchases. Cards often carry pictures of celebrities or fictional characters that are especially appealing to young buyers.
Some have referred to these cards as “credit cards with training wheels” and, when used appropriately, they can help young people learn money management skills. Proper use does not mean giving them to children who have a propensity for spending or who have little, if any, understanding of the value of money. One of the hazards of allowing young people to use pre-paid cards is that it minimizes their ability to use cash for purchases. Having a set amount of cash to spend is more tangible when trying to teach children how to budget their money.
Once young people have grasped the concept of living within a budget, giving them a pre-paid credit card can be a good transition to wise credit card usage. Today it’s impractical to expect people to live a life without credit cards. It is appropriate, however, for parents to help young people learn to use them properly.
Pre-paid cards may actually have some advantages over cash or traditional credit/debit cards. The cards allow parents to monitor children’s spending habits and place limits on the ability to make online purchases.
Pre-paid credit cards are also a viable option when making online purchases. The majority of identity theft cases are related to online shopping, and using a pre-paid credit card can help diminish the impact of fraud. For example, potential thieves are limited to the amount of money on the card rather than the credit limit on a regular credit card. They are also a better choice than a debit card because there is no access to a checking account.
On the other hand, pre-paid cards may promote spending if not handled properly, and they may be expensive to use. Most pre-paid cards have fees for loading funds, monitoring the account, and exceeding your limit—just to name a few.
Before deciding on a pre-paid card, carefully consider the maturity of your child and comparison shop to find the best option. There is more to consider than just deciding which celebrity’s photo to put on the card!
Sue Lynn Sasser, PhD, is an associate professor of economics at the University of Central Oklahoma. In addition, Dr. Sasser serves as executive director of the Oklahoma Council on Economic Education and director of the UCO Center for Economic Education. She is past president of the Oklahoma JumpStart Coalition for Personal Financial Literacy. She lives in Edmond, with her dog Lily.