Can prepaid debit cards for kids make them smarter about money?

I wish I could tell you that I finally gave in to my teenage daughter’s relentless “request” for a debit card so that I could impart fatherly financial wisdom. 

The truth is, I would slip Sydney a few bucks here and there when she went to the mall with her friends and I wasn’t exactly keeping a tight accounting of her cash or spending habits.

Nonetheless, I fell for the pitch behind the Greenlight Mastercard that I got for her. Namely, that this $4.99-a-month card, one of several plastic debit or prepaid cards aimed at younger spenders – FamZoo, Current, and gohenry, are among other variations – would help me set spending limits and raise a financially-smart kid. And maybe, just maybe, teach her everything from operating within a budget to learning about the concept of compound interest. 

What parents are asking about kids' spending

Before choosing Greenlight, my wife and I were asking the same questions on the minds of many parents: How old should your kids be before they get their first debit card? How do you teach your kids to be responsible about money? Should you give them an allowance, and if so, how much? Do you make them “work” for the money by doing, say, household chores? 

The short answer is that every family and circumstance are different. Ask yourself honestly if your kid is conscientious, mature and independent. Then consider what kind of shape your own finances are in.

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Frankly, given how much credit card debt so many adults have racked up, it’s not lost on me that even grown-ups don’t always take the fiscally prudent path.

The sweet spot for when it is appropriate to give kids their card tends to be around the time between middle and high school, says Bill Dwight, the founder of FamZoo.com, which combines a prepaid card with a family finance app. Greenlight co-founder and CEO Tim Sheehan sees a similar starting age. But some kids get cards when they're younger, others older, and there are no specific minimum age restrictions. 

Debit cards are obviously not credit cards, and the distinction is very likely lost on kids who mistakenly may see all the plastic in your wallet as being equal. It’s up to you to right off the bat explain the difference and let them know that the card you’ve given them has those finite spending limits.

While not endorsing any one particular debit card for kids, Laura Levine, CEO of the JumpStart Coalition for Personal Financial Literacy in Washington, D.C., is a fan of the concept. But there are caveats. 

“What I remind parents is you don’t just hand the card over and walk away and say this experience will teach them,” she says. “I think these debit cards created for young people are a wonderful practice tool with a lot of parent guidance.”

Setting spending limits

The Greenlight card has several features I really like that likely would appeal to other parents, too, all managed via the parent version of the Greenlight app.

After funding the Parent’s Wallet through your own bank account, you get to dictate how your kid can spend. You can direct funds, for instance, into a Spend Anywhere bucket that is just that; the kid can use the plastic card in any store that accepts a Mastercard. 

But you can also apportion a set amount of money that can be spent only in stores or types of stores (any restaurant, any gas station, etc.) that you specifically approve of in advance. You can also allow the kid to withdraw cash from an ATM, up to an amount you designate.

Parents can view the child’s spend history through the app. On their version of the app, kids can check their balance and permissions.

You can also arrange to receive notifications that tell you where and when your kid spends money or in case a merchant declines a purchase. And yes, you can allow your kid through the app to request more money on the spot – allow such requests at your own peril.

Both parents can manage the kids’ accounts. And the $4.99 monthly fee covers up to five children in your family. (I haven't gotten one for my 12-year-old son yet.)

One nice feature encourages your kids to put money into a Giving category where they can make charitable donations.

You can automate giving the child an allowance via the app, though how much money to give them is of course up to you.

According to Levine, the old rule of thumb of giving a kid $1 a week for every year of their age may be outdated. "If the amount that we allocate them for their allowance is so little that it takes them so long to accumulate enough for anything meaningful, they won't make it and give up and get frustrated and it'll leave a bad in taste in their mouth," she says. "We don't want to be so generous that it's not a struggle; we want them to learn delayed gratification. But if it's an impossibly long difficult delay it may not be the outcome that we want."

Inside Greenlight, you can tie an allowance to a set of designated chores. Since parents may disagree on whether you should make your kid work for the allowance or that you should pay them for helping around the house, you can debate this one among yourselves. 

“The only thing that is important is that you have a thoughtful system that you roll out with your kid and you have conversations about money,” says Dwight of FamZoo.

Paying your kid interest

Both FamZoo and Greenlight encourage a kid to save through a parent-paid interest rate feature. 

In Greenlight, the annual percentage yield interest rate of this feature is calculated and paid monthly based on the average daily balance of your child’s total savings in the previous month. The money comes out of your own parent account, and hopefully gives the kid the sense that left alone, their savings balance will grow.

If your kid wants to purchase a bigger ticket item than you’ve given them the money for, they can put money into a savings goal account. The kid would then need your permission to move money out of that account.  

Greenlight has built-in safety features. Data and any pictures of your kid that you uploaded are encrypted. There’s a PIN associated with the Greenlight card, and the accounts are FDIC insured. The company also says it has disabled card usage in any store or website that handles or does business in wire transfers, money orders, escort services, massage parlors, lotteries, gambling, horse racing, and dog racing.

Keep in mind that any responsible message you want to teach your kid about finance isn’t going to happen overnight. And recognize that when kids first get a card, it could burn a hole in their pocket. 

I started Syd out with what was to my mind a generous $100 contribution. I tried to stress that she shouldn’t blow it all in one place at one time because she’d have to learn to budget. Let’s just say this concept is a work in progress. 

I also made a tactical error when I chose to surprise her with Greenlight. She freaked out when she received an unexpected text on her phone that said, “Your Dad would like you to join him on Greenlight” and supplied a link she should click on.

What’s next? Greenlight’s Sheehan hopes to launch a custodial brokerage account in the second half of the year to teach kids how to invest. I'm not there yet with my own kids.

Parents, let us know how you manage finances with your kids. Do you give them an allowance? Do they have a debit or other card? Email: ebaig@usatoday.com; Follow @edbaig on Twitter