Getting a credit card is an important step in learning to manage your finances, and build your credit score but teens have to be 18 to get a credit card. Until then using a prepaid credit or debit card can teach them a lot about money.
How do prepaid credit cards work?
Prepaid credit cards work by allowing users to load money onto the card and then use it to make purchases just like a regular credit card but without the debt. The card is usually backed by a major credit card company and has a logo, such as Mastercard or Visa, which allows it to be used at any merchant that accepts those brands.
Unlike traditional credit cards, there is no credit limit on prepaid cards as spending is limited by the funds that have been loaded onto the card. Once the balance on the card has been used, you have to reload the card with more funds to continue using it.
Some prepaid cards may also charge fees for certain services, such as reloading the card or checking the card balance.
Does a prepaid credit card build credit?
A prepaid credit card does not build credit, as they are not traditional credit cards, and do not report to the credit bureaus. This means that your child’s use of a prepaid card will not have any impact on their credit score.
How does a prepaid debit card work?
A prepaid debit card can be used to make purchases in-store or online and to draw cash at an ATM. Money is loaded onto the card, and then you can use it to pay for goods and services.
Does a prepaid debit card build credit?
A prepaid debit card does not build credit as it isn’t a credit card. This means that your child’s use of a prepaid card will not have any impact on their credit score.
When is a prepaid card a good option?
A prepaid card is a good option if your child isn’t old enough to have a bank account, as it’s a good way to access money and make purchases. A prepaid card can help in the following ways:
Teach kids how to budget. Prepaid cards can help your child learn to budget as they can only spend money that they have already loaded onto the card. This can help to avoid overspending.
If you want to give your child an allowance. A prepaid card can be a good way to give your child regular money. You can load the card with a certain amount of each week or month, and then your child can use it to buy things.
You want to teach your kids about spending, saving and tracking their spend in a safe way.
You're traveling abroad. If you are on vacation with your child, a prepaid card can be a good way to buy things and spend money in a safe way.
Alternatives to help your child build their credit score
If you want to help your child, there are a number of ways to help your child build a credit score when they are under 18.
Add your child as an authorized user to one of your credit cards. When you add your child as a user to one of your credit cards, their credit report will be linked to yours. If you have a good credit score, this can be a great way to help your child build their own credit history. Though always bear in mind that allowing them to use your card can be a risk to your credit score, so ensure that they full understand how credit cards work and the consequences of not paying the monthly bill or going over the credit limit.
Open a joint credit card account with your child. A joint credit card account is a type of credit card that is shared by two people. This can be a good option if you want to help your child build their credit score, but you're not sure if they're ready for a secured credit card or to be added as an authorized user on one of your cards.
Help your child learn about credit and budgeting. One of the best things you can do to help your child build their credit score is to teach them about credit and budgeting. This will help them make informed decisions about their finances and avoid getting into debt when they are older.
How can GoHenry help?
GoHenry is a prepaid debit card for kids and gives them a ‘hands-on’ experience with money management. It comes with a separate app for parents so while your child gets a taste of financial independence, you get peace of mind with being able to set limits and monitor transactions.
At the same time, kids will be able to spend online and in-store and use ATMS to withdraw their money. They can also automate savings to reach their savings goals. Kids will also have access to Money Missions, our in-app financial education tool designed to accelerate financial literacy.