Teaching Young People about Finance through Prepaid Credit Cards

Parents are always looking for innovative ways to teach their kids about financial responsibility – especially these days when the average college student leaves college with 5-digit credit card debt and teen budgets can go haywire during just one short trip to the shopping mall. But with the advent of many new types of prepaid credit cards, parents are finding that using a prepaid card – which has a fixed credit limit – is a great way to help kids learn about credit card responsibility.

Think of a prepaid credit card as a financial bicycle with training wheels or a long leash to rein in spending. One of the biggest challenges when teaching a young person about finances – especially credit card debt – is to figure out how to balance financial freedom with budget limits. If you don’t give the child freedom to make their own money management decisions they will never learn how to be responsible with a budget, but if you give them too much slack they may get into financial trouble – and could even wreck your credit along the way.

Prepaid credit cards eliminate those factors because you cannot go over the limit on a prepaid card, and since it is backed up by cash in an account you cannot misuse the prepaid card in a way that will mess up your credit score. Meanwhile you can use it to build credit, so if a teen does a good job of using their prepaid credit card wisely they can earn the right to have their own real credit card – by earning a good credit rating that will start them out as an adult on a solid financial foundation. Good budget habits are rewarded in ways that the teens can clearly see and understand, but there is so much less risk than you can potentially incur by just letting a kid be one of the signers on your own Visa or Mastercard account. In that way the prepaid credit card is really like good training wheels because it is safe but helps the young person learn to navigate their own way in this credit-conscious world.
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