Why prepaid cards for kids -- even those endorsed by celebrities -- are a bad idea

Kim Kardashian arrives at a MasterCard event in New YorkPrepaid cards for kids hawked by a reality-show personality who became famous because of a sex tape: What could be wrong with that? Kim Kardashian has teamed with a financial services company to offer the Kardashian Prepaid MasterCard, which is being peddled to kids as young as 13 and their parents. The supposed benefit of giving a teen plastic? Well, they might buy drugs if you give them cash, according to the publicity materials for the card.

Ridiculous, right? As it turns out, prepaid cards for teens aren't a new market. All four of the big network providers offer their own versions. Visa's Buxx card, a pioneer in the segment, has been around for nine years. Visa is also the network of choice for the PAYjr Chore & Allowance card, which is aimed at =- get ready for this -= kids under 12. It's pitched as an alternative to giving a tyke their allowance in cash. MasterCard offers the Facecard, American Express has the PASS card and Discover offers a prepaid card called Current. All are marketed as ways to help teens better manage their money.
It sounds great, except the idea that you can give one of these cards and send them out into the world (or at least to the mall) better-equipped to deal with the temptations of a consumer society isn't true. Curtis Arnold, CEO of CardRatings.com and a father of six, tells WalletPop that while these cards do have a place along the path of educating children about card usage, kids still need to learn the lessons of fiscal responsibility from parents.

Here's why: Statistically speaking, Arnold says, people spend 12 to 18% more when they pay with a card -- credit or debit -- than when they use cash. "Bear in mind that even if you are proactive and monitor their account online, they're still statistically going to blow through that allowance quicker," he says. Don't start them out with a card; give them a cash allowance and get them used to budgeting their spending money first, Arnold advises. "After they've proven themselves, then consider a product like this and see how it affects their spending." If (or when) they do spend more, you can point that out and have a conversation with them about how cards subtly get people to spend more. "That's when it becomes a teaching tool," Arnold says.

He also brings up one final point about these cards: They're not cheap. The "Kardashian Kard," for instance, costs around $100 for the first year of use -- only $5 of which is actually loaded onto the card -- after which a monthly fee of around $8 applies. Many prepaid cards carry hefty fees for activation, reloading and getting money from an ATM. Some, like the Kardashian's, charge a monthly service fee.

Arnold recommends parents use a no-frills debit card without overdraft protection that is linked to a savings or checking account in which parents can deposit allowance or spending money. "I'm all about teaching financial responsibility and management, but don't buy into the marketing," Arnold says of the prepaid cards. "There's no substitute for those hard conversations."

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