Is Getting Prepaid Credit Cards for Teens a Good Idea?

Using prepaid credit cards for teens limits the amount of money the young person can spend at one time. It also limits the amount of negative credit behavior that could be accumulated. At the same time, the prepaid cards allow a parent to give teens some independence in their finances and security at the time of an emergency. Despite all of these benefits, there may be better options to limit exposure to debt and still teach responsible spending.

Building Credit Young is Important

If a teen waits until he or she leaves the home to get a first credit card, it may be difficult to get a card or loan. Creditors look at not only how well a person has managed debt in the past but how long the credit history is. For a person who has no significant loans on record, it will be a challenge to get any form of loan. This includes student loans, car loans and credit cards. The earlier a person can start managing debt the better, and having credit cards as a teenager is a good time to start the process. Parents can begin training the teen when they still have a final say in spending.

Prepaid Cards don't Build Credit

Unfortunately, prepaid credit cards do not build credit in any way. The funds are not actually distributed as a loan, and only loaned monies can be used to build a credit score. Parents purchase prepaid credit cards for this reason; they do not want irresponsible spending on the teen's part to negatively impact credit in the future. With a prepaid card, teens and parents are protected against negative reports. However, they are also missing the potential benefits of positive reports.

Further, a teen should begin learning the principles of good credit early. The teen will be able to get a credit card very soon. Instead of making that experience their first, it may be better for teens to have instruction on how to use credit cards and pay bills. One on one instruction and letting a teenager learn from their mistakes is sometimes the best teaching method.

Low Limit Credit Cards

One great alternative to gain the best of both worlds is a low limit credit card. Credit cards with low limits can max out very quickly. For example, it is possible to get a teen a credit card with a limit of only $500. Once the teen has spent that money, there is no option but for the teen to pay the money off before moving forward. In essence, this is not that different from reloading a prepaid card.

If a parent helps to monitor billing cycles and assure all bills are paid on time, the teen will begin to learn how interest accumulates, see the difference between monthly payments and balances, and, most importantly, understand how credit scores are affected by spending habits. When the teen leaves for college or the workforce, the teen will be armed with this knowledge to help avoid negative credit habits in the future. The teen will also have a chance to get better deals on necessary loans.

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