Giving a 6-Year-Old a Debit Card Sounds Insane. Here's Why Some Think It's a Smart Money Move

The piggy bank is so passé—get your kids some plastic.

That’s what supporters of a growing group of tools aimed at teaching kids money skills claim. The new products—debit cards designed specifically for joint parent and child accounts—were created as a solution for parents who were bombarded with requests for money from their kids and who rarely had cash on hand to pay weekly allowances.

But they’re also marketed as a way to show kids how to spend smartly in an increasingly digital world.

“We’re really trying to simulate the kinds of things kids will see in the real world, just with parents in charge,” says Bill Dwight, who founded FamZoo, which dubs itself as a family bank, back in 2006.

Today, more than 1 million families in the U.S. have signed up for an account with one of the three largest players—Greenlight, gohenry, and Current—that are currently on the market, according to self-reported numbers. Each of these debit cards for kids have an overwhelming share of five-star reviews on their app pages.

Dean Brauer, co-founder of gohenry, says the app launched for kids aged 8 to 18, but when younger siblings saw their brothers and sisters using it, they wanted their own account. Now you can sign up 6-year-olds. The idea, he says, is to build confidence with money management in a safe environment, a sort of sandbox for learning to spend and save.

Prepaid Cards for Kids

Basically, the products are prepaid debit cards. (Unlike the other products in this piece, Current is a custodial bank account, not a prepaid card.) Yet while prepaid debit cards and checking accounts designed for teens have long existed, these newer offerings include integrated apps that help kids track their spending and customizable oversight features for parents.

The accounts allow kids to split allowances into pots for saving, spending and donating to charity. Parents can set limits on ATM withdrawals or build chore lists. They can arrange for automatic allowance or payments only after those chores have been marked as complete. One of the companies, Greenlight, gives parents the ability to dictate at which stores kids can use their debit cards. (Other cards offer a similar functionality, but only as a block feature after a purchase has already been made.)

FamZoo, which is considerably smaller than the newer entrants but beloved by its users, pioneered parent-paid interest, in which parents can set a rate to pay out on their children’s savings accounts. Now most of the products offer something similar.

Tim Sheehan, CEO of Greenlight, says some parents on that platform choose to pay out an interest rate of 50% or higher.

“The idea is to really heavily incentivize savings, so kids build a habit,” he says. “Parents can exaggerate to make the point.”

Greenlight and gohenry both plan to introduce investing functions next year. Details on how those features will work are limited, but Sheehan says kids with Greenlight cards will be able to suggest investments that parents can review.

All the apps carry a subscription fee, ranging from about $3 to $5 a month. There are also fees for card replacements and you'll get charged a fee by the ATM owner for withdrawals. (FamZoo is unique in that it offers free card replacements and it has fee-free withdrawals if you use a Moneypass ATM.) None charge a transaction or loading fee like some other prepaid debit cards.

The most common users are preteen and young teenagers, who are spending more time out of the house without their parents around. But parents can start their children much younger--Famzoo says it's perfect for kids "preschool through college;" Greenlight doesn't specify a minimum age. Current focuses on teenagers, but says parents can open accounts for younger users if they want. Representatives from all the companies say they have families across the income spectrum using the products.

But Do They Work?

The kids' debit cards must be loaded with money by parents, but once the cash is in a child’s account, they’re free to spend it as they like—so long as they’re within the rules set up by the parent.

And because the kids make the spending decisions, they have to start making trade-offs, Sheehan says.

Sheresa Pompay opened an account through FamZoo when her daughters were 8- and 11-years old. The family, which lives in Mesa, Ariz., has been using the prepaid cards for four years now. Pompay puts the kids allowance into the accounts and pays for good grades. She also pays out weekly interest on their savings. Her rules: The girls have to contribute 10% of their money into a charity pot—they donate it to local animal shelters—and put away at least 30% for savings. The remaining 60% is theirs to spend or save as they like.

“I think that’s helped cut down on the asks, and helped them realize that all that stuff costs money,” she says.

A recent survey from T. Rowe Price found that about half of parents didn’t start regularly talking to their kids about finances until they were 13 years or older. And many parents—more than one-third—are reluctant to talk about family finances at all.

Yet research says by that age, kids’ thoughts and habits surrounding money have already begun to develop. Scientists at the University of Michigan, for example, showed that kids as young as 5 years old have emotional reactions to spending and saving money that can influence their behaviors.

Real-life conversations will be key to whether the new products actually succeed at teaching kids to be better with money, says Joline Godfrey, author of several books about kids and money, and the founder of The Unexpected Table, a company that focuses on promoting dialogues in families.

With kids between the ages of 5 and 7, for example, parents could use the apps as a tool to focus on helping their kids learn to discriminate between items they need to purchase and items they want to purchase.

But Godfrey thinks the apps may provide so much convenience that families will miss teachable moments. And more than that, she worries the apps could become “monsters” when used only to make spending at will more convenient.

“Kids will develop habits of consumption without developing habits of management,” she says.

How to Use Prepaid Cards for Kids

Executives at Greenlight and gohenry predict they’ll have millions of users in America within a couple years. If your family becomes one of them, here’s how to make sure your app doesn’t turn into a monster.

Carve Out Time to Review the App Together

Talk about why the kids want to purchase a certain item, or why certain tasks earn payments while others do not, says Brauer. Some families consider basic chores a requirement of family life, so they don’t merit money. Others use money to reward good behavior, such as consistently making the bed or earning good grades. And don’t focus only on your children’s spending. Use the app as an opportunity to talk about the entire family’s finances and money values.

“Give kids credit for being more thoughtful about financial management from a very early stage,” Godfrey says.

Let the Kids Make Spending Decisions

The whole point of the product is to get kids to manage money on their own. They can’t do that if you’ve set the rules so strictly that they have no freedom to make mistakes.

But you should be stricter when they run out of money, otherwise kids will become complacent if they know their parents are watching their account and will dig them out a of a low-balance hole, Godfrey says.

Ask Your Older Kids to Buy Household Items—Even If You’ll Reimburse Them

Dwight, the founder of FamZoo, says he regularly asks his teens to buy items that he plans to pay for after the fact. That way they learn how much their shampoo or favorite snacks cost, and there’s no sticker shock when they leave the house and have to start providing for themselves.

Dwight also recommends billing older kids for monthly expenses, like cell phones, even if it’s just a nominal amount. That will reinforce the idea that you have to keep a balance in your account at the end of each month to cover bills.

“That sounds basic, but if you’ve never practiced it, why would we expect people to learn it through osmosis?”