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Should You Drive Your Teen Into Debit?

When I was a kid, my friends and I plastered posters of the idols of the day on our bedroom walls. Duran Duran, Timothy Hutton, John McEnroe, and Madonna stared at us as we gossiped about boys and planned our outfits for Friday night's football game.

Today the stars gracing the cover of Teen Beat are different -- and so is the way kids pay homage to their idols. Hilary Duff, Usher, and Spidey aren't only plastered on kids' walls. Now they're in their wallets, too.

Prepaid debit cards for teens are one of the fastest-growing segments for Visa, MasterCard, Discover, and American Express. According to TowerGroup, bank-issued gift cards will reach $300 billion in sales next year. Another study found that nearly 80% of those ages 18 to 34 have used a prepaid card.

Getting kids to sign on the dotted line isn't hard: The hot buttons are on their screen savers and taped to the insides of their school lockers. The Hello Kitty prepaid Visa looks perfect in your daughter's Hello Kitty wallet.

Before you accuse the industry of employing a shallow marketing hook, take a look in your wallet. Raise your hands if a cashier has ever commented on your alma mater. With teens spending around $150 billion to $200 billion a year (I wonder how that figure compares to what my generation spent on Bonnie Bell Lip Smackers), it's no wonder banks are using affinity cards to infiltrate your offspring's wallets.

We know why Junior's pining for plastic and why the lending industry is happy to oblige. Should Mom and Dad acquiesce?

Teen training wheels
It looks like a credit card and acts a lot like one, too, but prepaid debit cards have a few important stopgaps that parents can appreciate. A prepaid debit card is like a reusable check -- purchases are deducted from the amount deposited onto the card. They are more versatile than traditional gift cards because the user is not limited to purchases at a specific merchant, which can be invaluable when money is needed in a pinch (for a true emergency, not the munchies). Those emblazoned with the Visa, MasterCard, or American Express logo (subtly in the corner of Hello Kitty's shoulder) are accepted anywhere you see the sticker posted.

Unlike a debit card from your bank, prepaid cards have no lifeline to a checking account. The cardholder (or the cardholder's parents) can set strict spending limits so Junior can't wipe you out at Urban Outfitters. According to Cardweb.com, the average gift card/prepaid credit card balance is $50, indicating that it's likely those on limited incomes (e.g., kids working at Mom and Dad, Inc.) using them.

These cards aren't a new idea, but peddling them to your children is. Perhaps you've heard of "secured" credit cards. They were the lending industry's answer to customers with a shaky credit history. The user sends in a security deposit that keeps him within preset spending limits and helps him build a habit of on-time payments.

The newer use prepaid debit cards are ideal for kids who lack an adult's impulse control and access to cash. It exposes teenagers to the culture of credit cards without the pitfalls (overspending, late payments) that prove ruinous to many young people's credit records. They also give parents peace of mind, much like cell phones enable parents to check up on Buffy and her friends who went to a late movie. Ahem.

Prepaid plastic speed bumps
Wander through the junior section of a department store, and you'll discover that teens pay $5 to $20 more for practically the same T-shirt in women's active wear. The difference? The logo. The same clerks are apparently pricing prepaid debit cards, too. Membership has its costs, and the cards emblazoned with the most popular celebrities can demand a premium.

Kids may have a high tolerance for obscene markups, but parents shouldn't, particularly when it comes to outfitting their family in prepaid plastic. Take, for example, the Usher Raymond IV Debit MasterCard. The card's terms and conditions will leave your poor child penniless:

  • Card activation fee: $15
  • Shipping and handling fee: $3.95
  • Monthly maintenance fee: $4.95

Junior's racked up $23.90 on the card before he's even headed to Tower Records. When it's time to replenish the empty card, that's another $3.95 for the value load. (Parents can put off paying that fee by putting a maximum $2,500 load limit on the card. Yeah, right.) Heaven forfend that your child loses the card (replacement card fee: $9.95), needs to talk to a live customer service agent on the phone ($1.50 per minute), orders a paper statement ($5), and uses an ATM for a cash withdrawal ($2) or to check his card balance ($1.50). And that's not even counting foreign ATM fees.

Fees aren't the only "gotchas" with prepaid plastic. Cards expire (industry experts say up to 17% of balances on loadable and nonreloadable cards typically go unused), and low limits can hinder some purchases. For example, customers using a prepaid debit card with a low balance at a gas station or restaurant may find the card declined. That's because merchants pre-authorize a certain amount of purchases where the final tab is unclear. So a $20 restaurant tab -- pre-tip -- may not go through if you have only $25 in funds on your debit card. Therefore, kids need to keep a cushion -- $100 is safe -- so they are not caught with empty pockets at an inopportune time.

For most, a prepaid debit card is a temporary tool. There is a time (after your teen has demonstrated his grown-up ways) where a regular credit card makes sense, particularly to help build a credit history.

Some critics say that giving kids access to plastic of any ilk encourages wanton spending. I think our culture does that quite handily on its own. Credit card companies provide financial tools. It's up to parents to teach values and restraint, and to set limits. A prepaid debit card is one way parents can teach fiscal responsibility.

Four out of five clerks comment onDayana Yochim's credit card -- aMotley Fool Visasporting a colorful jester. As is required by The Motley Fool disclosurepolicy, she must immediately disclose her affiliation, drop to one knee, sing the Fool Fight Song, and point all interested parties to jobs.fool.com.


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