Bailout

Give teens bank accounts, not prepaid cards

By Felix Salmon

Dan Kadlec is right to give short shrift to the horribly misconceived Kardashian Kard, a prepaid debit card aimed at teenagers. But I think he?s too kind about prepaid debit cards in general:

There is nothing wrong with a pre-paid debit card for young people. Pre-paid cards have a lot of advantages:

* Kids can use a pre-paid card to shop online.

* Parents get a detailed spending report.

* Over drafting is not a risk.

* Pre-paid cards are easy to re-load and thus are good vehicles for paying allowance, assuming no or low re-load fees.

* Kids become familiar with plastic in a controlled environment.

* In some cases, your child begins to build a credit score.

Dan links to a piece by Beverly Herzog explaining why debit cards can be a better idea than credit cards. Which is all well and good ? but the thing I don?t understand is why no one seems to be screaming from the rooftops that no standalone card offers the flexibility and convenience of a good old-fashioned bank account.

Every kid should have a bank account, with a debit card, but without overdraft protection; something like the USAA Teen Checking account is perfect. Given that it’s just as easy to take out cash at an ATM with a prepaid debit card as it is with a normal debit card linked to a bank account, I can’t think of any good reason why a parent would opt for the prepaid debit card. Prepaid debit cards are expensive (although there are some which aren’t as expensive as the Kardashian Kard, it’s true); they don’t have branches; it’s hard to deposit checks from relatives into them; they don’t pay any interest on savings balances; and, most importantly, they don’t give teens a safe way to get used to how bank accounts work.

The main danger with a teen checking account is that the kid will bounce checks and run up NSF fees — but frankly there’s no reason why the kid should ever have a checkbook in the first place. Checks have about as much relevance to kids as do floppy disks, and the only people who might want to see them are nostalgic parents who associate financial literacy with the bizarre ritual known as “balancing your checkbook.”

We’ve already been greatly harmed, as a nation, by the move from personal loans to credit cards. Let’s be on the lookout for a similar move from checking accounts to prepaid debit cards. No good can come from that, beyond excessive fees and an uptick in egregious celebrity endorsements.

Full post as published by Macroprudential on November 12, 2010 (boomark / email).