Teens And Personal Finance - Why Prepaid Cards Are A Bad Idea
It's the new plastic way to pay, but it's also the latest way to get completely ripped off by credit card companies.
According to the Federal Reserve's 2010 non-cash payment study, prepaid cards are the fastest growing payment method. Prepaid cards grew at a rate of 21.5% per year between 2006 and 2009, and the value of purchases made with these cards grew 22.4% per year.
It certainly seems as if prepaid cards have the potential to be a simple solution to paying with the efficiency of credit or debit while avoiding overdrafts and high interest payments. The fact of the matter is that companies that sell these cards and services need to make a profit. They do it through hidden fees and surcharges.
Common fees associated with prepaid cards include activation fees, monthly membership charges, ATM fees, fees to check your balance, fees to cancel the card, fees to reload the card with additional funds and much more!
One type of prepaid card that made headlines in 2009 featured reality TV stars the Kardashian sisters. It turned out that it would cost the typical user more than $100 a year to use the Kardashian card. The media heard about all the fees and had a field day criticizing both the card and the Kardashians. The Attorney General of Connecticut called the card "predatory" because of all the hidden fees.
It didn't take long for the Kardashians and their lawyers to get involved. The Kardashians no longer wished to be associated with that product and the card was taken off the market.
Unfortunately, that's just the tip of the iceberg, and many of these cards are being marketed to teens. Yet another kind of prepaid card known as the Myplash card depicts cute cartoons and characters from the Twilight movies.
Myplash fees include $6.95 for activation, a $4.95 monthly charge just to use the card, another $4.95 fee to reload the card and $1.50 charge for using the card at an ATM. Online consumer advocacy site The Consumerist estimates it would cost a typical user more than $138 in just the first year of using the card.
Various consumer groups have conducted studies on prepaid cards. Research shows many of them are not covered under the same protections against theft and fraud as credit cards and debit cards.
Those who think using prepaid cards can be used to teach kids about personal finances are sadly mistaken. Of course, you may want your kids to learn about hidden fees the hard way.
If parents want to teach children about managing finances, a better idea would be to open a teen checking account, such as those offered by USAA bank and Wachovia. Your local bank or credit union may also operate similar programs.
When you order checks online, you'll find that prices are much more affordable than going through your bank. You can also find personal checks with popular cartoon characters as well as many other cool check designs.
This method will help teens learn how to budget. Using personal checks forces them to write down the amount that's coming out of their bank account - so it's very obvious how the purchase will affect them. If they are using prepaid cards, teens are much more likely to swipe away without thinking about the consequences of their spending.
Handing your children prepaid cards is a good way to get them addicted to using plastic to pay. That could send your child down a path that only leads to massive debt and financial struggles.
Try to find more responsible ways to teach your kids about finances. Credit cards don't have to be evil if you use them wisely - but first your teens need to learn the basics.
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