What is a prepaid card?

With a prepaid card, the cardholder spends money which has been "stored" on the card via prior deposits, as opposed to credit cards where spending generates a debt to be settled when the bill comes in at the end of the month. Even though prepaid cards that are Visa® or Mastercard® branded are accepted at all merchants that accept Visa or Mastercard debit cards, they do not require the opening of a bank account, unlike a debit or ATM card.

Funds can be loaded onto a prepaid card from another card (credit card or debit card) or from a bank account (checking or savings), or from an employer’s direct deposit of salary, depending on which prepaid card you choose. Unlike “gift cards” that can be bought in retail shops and don’t bear the name of the cardholder, prepaid cards issued in the name of a particular cardholder can be loaded an unlimited amount of times up to a preset maximum balance on the card, as long as the card is valid (typically a couple of years).

Certain prepaid cards are available to minors ages 13 to 17 and involve an “account owner” over 18, typically a parent or guardian who must purchase the card on behalf of the minor cardholder.

Prepaid cards are a great tool to teach financial literacy to teenagers. At any time it is easy to find out the balance of the card, as many prepaid cards provide online account access, mobile phone access, or a toll-free customer service number. As well, you can find some prepaid cards that provide separate online account access for the parent and the child, allowing different functions for both parties (i.e. loading the card, monitoring transactions, suspending a card). Many cards also include other key features, which you can view on the “Compare Cards” page.

How do prepaid cards compare to traditional banks and credit cards?

Bank Accounts: Unlike most retail banks, most prepaid cards require no minimum balance on the card account and most don’t charge you if have a minimum balance of $0.

As well, prepaid cards allow you to spend only the balance of the card – there are no overdrafts allowed; the purchase will simply be declined. Many retail banks allow up to a $1000 overdraft, causing bad spending habits and an increased chance for a lifetime of debt.

And with low cost value loads, you no longer need to worry about the usually hefty transfer fees required to transfer funds to another bank account. Plus, for most cards that provide credit card loads, those loads appear instantly…few banks can say that.

Credit Cards: As prepaid cards are not credit cards, there’s no APR or credit linked to the card. You spend only what is on the card balance and therefore are not able to go into debt.

But, like credit cards, most prepaid cards are linked to an international card company like Visa or Mastercard. This provides the same spending power and security that credit cards offer their cardholders – and necessary in today’s global economy.

Prepaid cards are both a great alternative to credit cards and a valuable educational tool to help your child learn to use a credit card wisely in the future. Unlike parent-sponsored credit cards, they are also a great short term savings instrument.

Is a prepaid card right for me and my teen?

With prepaid cards, you and your child can work together to budget spending and provide a lifetime of financial education. Most prepaid cards provide online access to monitor your child’s spending – you are not leaving him/her without supervision, but are able to help guide him/her to sound financial practices. Your child can gain independence to make purchases without having to use your personal credit/debit card or unsecure cash.

Many prepaid cards also provide allowance scheduling and instant reloads to guarantee that your child never goes without the money they need, whether at the mall or at college. As well, some cards allow outside Direct Deposit transfers so your child can also get his/her pay from an employer or occasional funds for birthdays, graduations, etc from family and friends.

Most importantly, unlike most retail banks and credit cards, prepaid cards don’t want to see your teen in debt. In fact, many cards work hard to keep your teen as far away from debt as possible by providing spending alerts, educational resources and more.