Prepaid cards, such as debit cards, are ideal for people who find it difficult to control their spending habits or those who have limited funds. The balance on these cards belongs to the cardholder, so they incur no debt when they spend money. They don’t get charged any interest, and the cost of maintaining prepaid cards is also much lower.
This makes prepaid cards ideal for people without a bank account and depends on someone else for their expenses. Young people, students, and teenagers on a budget and get a monthly allowance from their parents can be given a prepaid card to meet their expenses. Since the card cannot be used once the balance runs out, it ensures that they use it responsibly and don’t go over the limit.
How Do Prepaid Cards Work?
A regular credit card benefits the issuer at the user’s expense. The moment you spend money on the card, you are taking out credit which carries risk. Besides the annual renewal fee, users are also charged interest on their spending, which increases the cost of carrying the card. Delays in payments can also hurt your credit score.
A prepaid card offers a reliable solution for millions of people. The card can be preloaded with a fixed balance each month or week and then used to make a variety of payments at fuel stations, retail stores, etc. You get complete convenience of using the card at any place where you can use a regular debit or credit card.
There is no overdraft fee or any interest charges involved. The card is also great for adults without a bank account, for whatever reason. It can be charged with cash or through another card.
The gift cards you can buy at the local store like Amazon, iTunes, or Walmart for shopping are good examples of prepaid cards. However, they can only be used for specific store purchases. A prepaid card allows you to purchase from all retailers that accept regular debit or credit cards for payment.
Prepaid cards have gained popularity in a short period. A survey conducted by the FDIC last year revealed that almost 10% of consumers are using prepaid cards for shopping in the U.S.
Benefits of Prepaid Cards
Prepaid cards are issued by Visa or Mastercard and can be used at any place where Visa and Mastercard are accepted. Some of the significant benefits of prepaid debit cards include the following.
Manage Budgets More Effectively
The best thing about prepaid cards is that you can only spend the amount you actually have on them. This promotes the habit of being responsible with the money you have and planning your expenses. Since the card will need to be reloaded after the balance is finished, it is necessary to be careful about what you purchase and keep track of your balance.
Young adults can get carried away with their money and buy anything that they like on a whim. Credit cards exploit this behavior. It can be very tempting just to get what you want and not worry about paying until later. A prepaid card promotes careful planning by limiting unnecessary purchases.
You can sit down with your son, daughter, or young relative and go over their monthly spending habits to estimate a realistic budget for their needs. Once you agree upon an amount, load it onto the card. This way, they can plan their expenses. You will be adding new money on the card once the balance is finished, which will allow you to monitor the spending much more effectively.
Great for Rebuilding Credit
Debit and credit cards can affect your credit score. However, prepaid cards don’t affect credit history.
If you don’t have a credit rating or if your credit rating is terrible, then prepaid cards are excellent. You can use them to carry out transactions without worry and build responsible spending habits before using a credit card. These cards are excellent for a credit recovery period.
Once you are good at spending within your means and have a responsible attitude, you can switch to a debit or credit card and control your spending better.
No Credit Checks Required
Most credit cards have limitations on who can apply or get them. Some premium cards are invite-only, and others require you to have a good credit score. The same is the case for debit cards, which requires opening a bank account and having some balance amount before a card can be issued.
Prepaid cards are an exception as they can be opened with no prerequisites. You need not have a credit score or bank account to get a prepaid card. The balance can go down to zero with no penalties, and the card is reactivated as soon as you add some balance on it.
Helps You Avoid the Banking Channels
Many people don’t like banks. Money put into the banking channel comes under scrutiny. All the checks and compliance requirements can be off-putting, and the bank’s ability to freeze your account may cause trouble at some point.
If all that you want is a simple solution for keeping money with you without the trouble of opening a bank account, then a prepaid card might be just what you need. The prepaid card is also useful if you don’t qualify for a regular checking account at a bank or would have to pay a monthly charge on the account.
You can give the prepaid card to your young ones and won’t have to worry about sensitive details getting stolen or significant financial loss if the card is lost or stolen.
Useful for Online Shopping
Prepaid cards can be used for shopping online, just like regular debit and credit cards. Since most young adults like to shop online, the card would be perfect for their needs.
The prepaid Visa and MasterCard come with FDIC protection similar to security for online checking accounts. If you suspect unauthorized usage online, you can report the fraudulent transaction to the relevant authority to protect yourself.
The prepaid card is similar to cash when you make a purchase at a high-street retail store. The card can also be used for paying bills, invoices, and membership fees at several organizations. There are no hidden charges, and it works at a large number of business outlets unless the place does not accept cards.
The one major disadvantage of prepaid cards is that you cannot get cash out of the ATM. While the balance can be transferred from the prepaid card onto a regular debit or credit card, you cannot merely get cash from the card because it isn’t backed by an account.
Teaching Young Adults to Use Cards Responsibly
10 – 14-Year-Old Teens
Prepaid cards are very safe, and you can load a small amount on the card before handing it out to young kids between the ages of 10 – 14. Explain to them how plastic cards work and the places where they can make payments using their card.
Show them the importance of keeping receipts. Teach them how to identify the amount they have spent and the amount left on the card. Parents should also monitor the spending habits of their kids at this age and discuss how the child can manage their monthly allowance better.
You can also reward them with an incentive for saving habits by giving them extra funds when they save some of the month’s allotted amount.
15 – 18-Year-Old Teens
Older teens should be taught the benefits of the prepaid card compared to the debit or credit cards. Tell them about concepts like interest charges, credit card limits, and penalties for delayed payments.
Also, explain the concept of credit scores to them at this stage and discuss how delayed payments can affect the score negatively. Older teens should be able to create budgets for their monthly spending habits and follow them.
If your teenage kid spends money impulsively and they cannot control their expenses, then the prepaid card might be the only option for keeping their spending in check. The prepaid card helps ensure that they don’t run into a situation involving debt by letting you monitor them closely.
18+ Young Adults
Young adults can easily apply for a credit card if their credit score checks out. However, if you feel that your kid is not good with money or needs a check on their spending, you can get them a prepaid card with a balance that can be renewed at agreed-upon intervals.
Since there is no credit history or bank transaction attached to the card, it wouldn’t affect their score even if they run out of money. You can keep a better eye on their finances with the prepaid card.
The Best Prepaid Cards for Young Adults
A variety of financial institutes, banks, and building societies offer prepaid cards that don’t require you to open an account or provide a credit score. We look at 7 prepaid cards quite popular right now. The list is by no means exhaustive but includes cards that we’ve come across as useful.
Famzoo Prepaid Card
This card is good and allows parents to lock or unlock the card, giving them some extra control. Balance can be transferred between cards, and there is no charge for reloads. It is one of the few prepaid cards which allow ATM withdrawals.
American Express Serve
The American Express Serve card is popular among users. It can be reloaded at over 45,000 locations across the U.S. at $0. The card may purchase online and has a monthly fee of $6.95. It is widely accepted at a large number of retail stores on the high street and online.
American Express Cash Back
This card is ideal for kids who spend a lot of money each month but stay within their allotted monthly allowance. The card has a slightly higher monthly fee at $7.95 and reloads cost $3.95. Every purchase earns 1% cash back. Cash rewards are added back to the card immediately and can be redeemed. A great prepaid card for big money spenders!
Akimbo Prepaid Mastercard
This card is aimed at families with more than one kid. Multiple cards can be used on a single master account. Users can manage the subaccounts through the Akimbo app. There is no monthly fee, and reloads cost $4 to $5.
Parents should teach their kids responsible spending habits. The best way to do this is by giving kids the freedom to use cards with a preloaded balance.