Suze Orman – thank you. Your prepaid card is a good thing for the millions of unbanked adults out there who have no other palatable financial options. Your fee is low and you give them an option to only using cash, and having to pay to have checks cashed. You are also doing a good thing by getting Transunion to gather data on these prepaid cards in the hopes that one day, this data could help get these cardholders some kind of credit score that could bridge them to the traditional world of credit.
BUT, Orman claims that her prepaid card is a good way to teach kids about money. I disagree. It is not the best option for our kids. Nope, not by a long shot.
To teach your kids about money, parents need to start early; teaching kids about their money choices and how to set goals for those choices. Next, you teach them how to budget by starting them on allowance. You give them an allowance that covers some of the expense in their lives that you now cover. You do this using an allowance contract that outlines (in writing) the agreement between you and your child, explaining how the money is to be used. You give them enough allowance, but not so much that they have no desire for anything else. Because we all know that kids will always want and “need” more than we are able to provide. You want them to be somewhat unsatisfied with the amount of their allowance because you want them to take that next step on their journey, and that next step is getting a job.
Once they have that job (or even before, like when you start allowance) help them open and fund a savings account. Link the savings account to a checking account and get a debit card to go with the checking account. Go ahead and apply for the credit card, but just hang onto it until they are ready. Let them learn to manage a checking and debit account well first, and then they can graduate to the credit card once they understand the benefits and pitfalls of credit. Teach them that a credit card should be used as a “charge card” and that the bill needs to be paid off in full at the end of each month to avoid paying unnecessary interest and fees.
If you do this, and you have patience, they will not need the prepaid card. They will understand how to manage their money. They will make small money mistakes (and experience the consequences) under your tutelage, and you will show them how to fix those mistakes and not make them again.
My kids have been checking, savings, debit and credit customers of USAA Federal Savings Bank for years. They pay nothing for these great services. We as their parents have taught them how to use each and every one of these financial tools responsibly. And nobody has paid any extra fees for the services. Another lesson the kids learned along the way – not all plastic is equal.
For teens that are going to be taught how to manage money responsibly, accounts like those from USAA are a great option. The total cost to parents will be the time that you invest teaching them the critical life skill of managing the money in their life responsibly, living beneath their means, saving for a rainy day, putting the do in donate by thinking about giving time or talent in addition to money to a cause that makes them pause. And don’t forget investing. Sure, it will take time to teach them the skill of investing. But it will help get them to think long-term – a skill most young kids have a hard time caring much about. And well, didn’t we all have trouble with that at their age? Weren’t we all just as invincible?
So thank you, Suze. What you are doing with prepaid credit cards is a good thing for some people. But let’s let parents teach their kids about money and credit with traditional financial tools that cost only the time it takes to learn to use them properly.