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Liz Weston, Published September 16 2013

Money talk: Prepaid debit cards not the best way to teach teens financial responsibility

Q: My son is 12 and re-ceives a regular monthly allowance that I’ve been giving to him in cash. I think it might be time for a checking account. I would like to teach him about using a debit card and not overdrawing his account. All the banks that I have called will not open an account for a minor, even a joint account. I’ve heard about prepaid cards being used for allowances, but I’m concerned about the fees.

A: You’re right to be con-cerned. You wouldn’t be teaching financial respon-sibility – the whole point of an allowance – if you gave him a prepaid card larded with fees to access his own money.

Prepaid cards, also known as prepaid debit or reloadable cards, typically aren’t linked to a checking account as regular debit cards would be. Instead, you can “load” them with cash in a variety of ways and then use the card to spend that money wherev-er regular debit cards are accepted. Many prepaid cards also can be used to withdraw cash at ATMs.

Unfortunately, many is-suers charge fees to open, use and close their cards. Monthly “maintenance” fees and fees to replace cards or talk to customer service are common. Some of the most expensive cards are the ones endorsed by celebrities. Those market-ing expenses have to be recouped somehow, and fat endorsement contracts often seem to be paid for with higher-than-average fees.

Anisha Sekar, vice presi-dent of credit and debit products for card compari-son site NerdWallet, rec-ommends two cards for allowances: the Bluebird from American Express and the Chase Liquid.

The Chase Liquid card doesn’t charge most of the usual fees. There’s no fee for activating a card, clos-ing an account, getting paper statements or paying bills. The card can be load-ed with money for free at a Chase bank branch or Chase ATM. Withdrawing cash at a Chase branch or Chase ATM is also free. The monthly fee is $4.95, but it’s still one of the cheapest cards available, she said.

The Bluebird doesn’t charge a monthly fee, and activating the card is free if you apply online. The card allows free ATM with-drawals within the MoneyPass netowrk if the cardholder is enrolled in direct deposit; other with-drawals incur a $2 fee. The card can be loaded for free from a bank account or by using cash or a debit card at a Wal-Mart. Loading with a debit card costs $2.

You’ll still face age lim-its, but there’s a work-around. Most cards have to be opened by someone 18 or older. A child must typical-ly be 15 or older just to have his name on the ac-count as a joint user. (With the Bluebird the age limit is 13.) So you would have to open the card in your own name and then give it to your son to use.

Another option may be to simply wait a year to get access to a regular debit card. Some national banks, including Wells Fargo and Chase, offer teen checking accounts for those 13 and older, although the ac-counts may not be availa-ble in all areas.

Q: I am 43 and divorced. I have a mortgage and an auto payment. I fully fund my 401(k) each year and am funding a Roth IRA. I also have emergency savings of $30,000 and a term life insurance policy for $350,000. What I don’t have is children or a spouse. I am thinking of canceling the policy, but is this a good idea?

A: The most important question to answer about life insurance is whether you need it. If no one is financially dependent on you, the answer is probably no.

Then again, canceling your policy is a bet that your life isn’t going to change – that you won’t someday have a partner who may need your income to pay the mortgage or other expenses, for exam-ple. If you’ve canceled your policy, you may find it difficult – not to mention more expensive – to get similar coverage later.

Term insurance is typi-cally fairly cheap. Current quotes for a $350,000 30-year level term policy for a woman your age are typi-cally between $40 and $60 a month. You’ll have to weigh whether the savings is worth what you’d be giving up.

Q: I understand that creditors eventually write off unpaid debts and re-ceive a federal tax deduc-tion for the loss. Then they sell that “debt” to a collec-tion agency. However, isn’t the debt rendered void by the fact the original credi-tor charged it off and got the deduction? So how can collection agencies attempt to collect an invalid debt?

A: Charging off a debt and taking the tax deduc-tion for the loss indicates the original creditor doesn’t believe it can col-lect the money. That doesn’t render the debt invalid or erase it in a legal sense. Debts typically exist until they are paid, settled or wiped out in Bankruptcy Court.

Liz Weston is the author of the new book “Deal with Your Debt.” Questions may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.