Learn the Credit Ropes with a Prepaid Credit Card
Contributed by Victoria Knox
Teach kids about credit with a prepaid credit card
When you want to help your high school or college age child learn about credit, prepaid credit cards can help. Prepaid cards work like other credit cards, but without the risk. There's no risk for the bank issuing the card or the person who uses it. Why? Prepaid credit cards are more like debit cards. The bank is not actually issuing credit.
How a prepaid credit card works
Parents can open a prepaid credit card and use cash to load a value on it. The card user can then go to a store and use it like any other credit card. The difference is the bank is not lending the user money. The card holder is simply spending the cash that was used to load the card. So how does a bank make money with prepaid cards? Banks charge one-time set up fees and monthly account fees. But these fees may be worth it in return for protecting the parent's and child's credit ratings.
Using an allowance with a prepaid credit card
To really learn about credit, a child should feel as if they are spending their own money. Parents can load a card with a few month's worth of allowance and let the child know how long the money is supposed to last. If the child spends the entire value in a week on a card that was supposed to last three months, guess what? No more money until the three months is up, or the child repays the parent from their own savings.
Children with after school jobs can also be told to reload the card with their own money on an ongoing basis. With prepaid credit cards, a child can learn a valuable lesson about how credit works and what can happen if a credit rating is damaged, without any real financial risk to the parent or child. Not being able to go to the movies or buy a new outfit for two months will really hit home with a teenager who over spent using a prepaid credit card.
