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SALT LAKE CITY — The popularity of prepaid debit cards has exploded in recent years. Some companies are touting them as a financial teaching tool for teens. But consumer experts warn these cards -- available at supermarkets and used wherever major credit cards are accepted -- can be more costly than anticipated.
Pop star Justin Bieber is pushing the SpendSmart card. It is the creation of a company called Bill My Parents, which calls itself the responsible teen spending company.
"Managing your money is really important, and there's a great company that can help you do that called SpendSmart," Beiber said in a commercial.
But consumer advocates object over the numerous fees linked with some prepaid debit cards. Plus, they wonder if it is smart to teach teens to pay a fee to use their own money.
- 2005: More than $2.5 billion was loaded onto prepaid debit cards in the U.S.
- 2012: That number surpassed $76 billion.
- 2015: Americans are expected to spend more than $168 billion on prepaid cards.
Source: Mercator Advisory Group
Bill My Parents CEO Mike McCoy vows his company's card will teach teens responsible spending habits that last. But Preston Cochran, president and CEO of AAA Fair Credit Foundation, said the name Bill My Parents seems ironic.
"To me, that says who's going to be footing the bill on this," he said.
Cochran said the SpendSmart card and other prepaid debit cards come loaded with numerous fees that may be beyond a teen's financial reach.
"You've got a loading fee. You're going to have an inactivity fee if you don't use that card. You're going to have a setup fee, a replacement fee if you lose that card, things of that nature that will typically add up," he said.
Just to have Bieber's prepaid debit card will cost teens — or their parents — $3.95 a month. Adding money can cost parents anywhere from 75 cents to $2.95. Plus, the card is riddled with more fees for withdrawing money at an ATM, balance inquiries and more.
Related:
Why Money Launderers Love Prepaid Debit Cards
Gone are the days when it was necessary to transport briefcases full of cash across borders. Now all money launderers need to do is pack a wallet full of prepaid debit cards.SpendSmart is just one of many prepaid debit cards available. Among the 15 analyzed by Consumer Reports last year:
- 14 charged for ATM withdrawals
- 13 charged monthly fees from $2.95 to $9.95
- Five charged for inactivity
"It's definitely very competitive in the space of prepaid," Cochran said.
Helping young adults build credit
"You're going to have people say, 'Yeah, I'm going to have (a prepaid debit card) for a kid in college. I can track their spending. I can do all these other things that maybe a checking account doesn't do,' which is actually false," Cochran said.
Most checking accounts linked to a debit card allow customers to track spending, have parental controls, read statements, and get an email or text message every time the cardholder makes a purchase. If you believe a prepaid debit card will help your kid build their credit, you're mistaken.
To truly teach young people how to handle credit, I suggest teaching them how to use credit cards and forgetting about debit cards.
"Building credit is going to be reported on the credit bureaus based on a credit card or loan. Even bank accounts don't report to the credit bureaus," Cochran explained.
He recommends parents approach teaching their children about personal finance almost the same way they would teach them how to ride a bike: with a training wheel.
"You open a checking account, you establish a relationship with a bank or credit union now. When you're ready to get that first credit card, hopefully you've been responsible in using that checking account. You're going to get some small, low-balance credit card that will allow you to build credit over time," Cochran said.
To truly teach young people how to handle credit, I suggest teaching them how to use credit cards and forgetting about debit cards. When it comes to teens, consumer advocates agree you're better off avoiding prepaid debit cards.
