Going cashless? What to know before you hand a debit card to your children

Personal finance

It’s the night before a school field trip, and your son or daughter suddenly remembers they need cash for the next day.

Do you have the money in your wallet? Or do you need to make a light-night stop at an ATM or have another child temporarily lend them the money?

Nicholas Prior | Getty Images

Tim Sheehan knows the situation well. Because he and his wife often go cashless, they were sometimes stumped when one of their four children needed cash.

That problem led Sheehan to co-found a company, Greenlight Financial Technology, to help make debit cards accessible to parents and their children.

Now armed with $54 million in fresh capital from a Series B round through venture capital and bank backers, the company plans to expand its reach.

Admittedly, it’s not the only business aiming to disrupt this market. Companies from GoHenry to American Express are working to put debit cards in the hands of minors.

The question for parents: Will giving these cards to your children help or hurt?

How Greenlight’s debit cards work

Greenlight’s offering lets parents create an account on behalf of their family.

Families including parents and up to five children pay $4.99 per month.

For that monthly fee, parents and children can designate money toward spending, saving and giving funds.

While there is no interest paid by Greenlight on the balances, parents can elect to give their children a “parent-paid interest rate” to incentivize them to save.

The average rate paid by parents, according to Sheehan, is equal to an 18% annual percentage yield. Meanwhile, the average interest rate on a savings account is 0.1% APY, according to Bankrate.

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Greenlight targets children ages 8 to 22 with its card. The average age of children using the card is 13.

Of note, it does not have a checking feature attached to it. It also will not affect a child’s credit score.

Parents decide at which stores their children can use the cards, as well as how much they can spend.

Children get one free replacement if they lose their card. After that, a $3.50 fee applies.

With the new infusion of capital, Greenlight plans to add a new feature that will also let children invest. They will pick the investments, among stocks, bonds, mutual funds or exchange traded funds. But their parents would have to approve the transactions before they go through.

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Ultimately, the company’s stated goal is to help establish healthy financial habits early on.

“If you can teach your kids to save and it becomes a habit, then that becomes their default approach to life,” Sheehan said.

The maximum Greenlight account balance per family is $35,000. Those balances are FDIC-insured through Community Federal Savings Bank, which is also an investor in the company.

Other Greenlight investors include Drive Capital, JPMorgan Chase, Wells Fargo, TTV Capital, Live Oak Bank and Relay Ventures.

What parents – and children – should know

Generally, the rules that apply for adult accounts also go for parent-child funds. Namely, that means you need to read the fine print, said Matt Schulz, chief industry analyst at CompareCards.com.

“It’s great if a card makes things convenient and easy, but if you get overloaded with fees, it ends up not being worth it,” Schulz said.

These costs can vary from monthly fees to charges to purchase the card or reload it, for example.

Fee disclosures, particularly for pre-paid cards, have gotten better in recent years, Schulz said. However, parents should still pay attention to the fine print.

“It’s very important that parents understand what they’re getting into, because it can be pretty pricey,” Schulz said.

Still, the fact that there are fees and other rules can be a teachable moment for children.

Be sure to explain the costs that come with the cards if you do decide to hand them over to your kids, Schulz said.

“What you don’t know can end up costing you,” Schulz said. “Most of us ending up learning that stuff the hard way.”

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