Image: Woman with mobile phone and credit card, smiling © Pando Hall, Photographer

Allowances are great for helping children learn to manage money. But cash is analog, and we live in an increasingly digital world.

Much of what my 10-year-old daughter wants to buy these days -- music, games, modifications (or mods) for those games -- is purchased online. We can handle these transactions in a number of ways, including:

●I charge the purchases and she pays me back with the crumpled dollar bills she’s earned.
●I add her as an authorized user to one of our credit cards.
●I get her a prepaid debit card and load it with her allowance so she gains some experience managing digital funds.

A couple of years ago, I wouldn’t even have considered the last option because prepaid cards had a deservedly terrible reputation for charging excessive fees. Prepaid cards hit their nadir in 2010, when the short-lived Kardashian Kard debuted with a $100 annual membership fee, plus an $8 monthly fee.

Today, there are much better options. They just don’t include the card from BillMyParents that teen idol Justin Bieber is shilling.

According to Odysseas Papadimitriou, the founder and CEO of the card comparison site Card Hub, some prepaid cards offer a combination of utility and supervision that are a good fit for older children’s allowances.

“Parents can give their kids an allowance on a prepaid card, while requiring that they cover some of their own discretionary expenses and thereby teach them how to budget, make purchases with plastic, use ATMs and manage a financial account in such a way as to avoid incurring unnecessary fees,” Papadimitriou said.  “Parents will also be able to review their kids’ spending habits with them and offer tips as needed.”

Prepaid cards are an option for children who are too young for their own checking account (our bank requires kids be at least 13) or who need more experience managing money before venturing into the world of potential overdrafts and other exorbitant bank fees.

For example, Allison Chappell of Salt Lake City set up her 16-year-old with a checking account and a debit card after the teenager got a job. Chappell got her younger child, who’s 13, a prepaid debit card with USAA Bank.

“It's worked out great,” Chappell wrote on my Facebook fan page. “She's learning to budget herself and watch her balance.”

However, if you’re considering a prepaid card for a child, you need to pick the right one. Some are so laden with fees that they could eat up most of your kid’s allowance, while sending the wrongheaded message that people should have to pay through the nose to access their own money.

That’s why Anisha Sekar of NerdWallet, another card comparison site, doesn’t think much of the SpendSmart card being promoted by Bieber. The card’s fees include:

  • A $3.95 monthly fee.
  • A fee of $1.50 for each ATM withdrawal.
  • Loading fees of $2.95 from a debit or credit card and 75 cents from a bank account.
  • A $3 inactivity fee if the card isn’t used for 90 days.
  • A $7.95 replacement fee to replace a lost card.

“It really sends entirely the wrong message to your kids,” Sekar said. “It prioritizes marketing and flashiness over sound financial sense.”

In other words, if your kid really likes Bieber, get her a poster instead.

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Card Hub compared the available options last year to find which would card work best for a hypothetical teen who receives $100 a month and who makes two purchases a week and two ATM withdrawals per month. The monthly cost ranged from $3 for The Approved Card from Suze Orman to nearly $20 for the ACE Elite Prepaid Visa Fee Advantage Plan.

Papadimitriou said parents should look for cards that:

  • Can be loaded for free from a bank account.
  • Have minimal monthly fees.
  • Don’t charge for purchases or in-network ATM withdrawals.

Cards that fit the bill include The Approved Card, the Kaiku Prepaid Card, and the Bluebird card from American Express and Wal-Mart, said Papadimitriou.

Sekar prefers the Bluebird and Chase Liquid cards for allowances. The Chase Liquid card doesn’t have fees for activating or closing a card, replacing a card, getting paper statements or paying bills -- all charges that are common on other cards. You can load and withdraw money for free, as long as you use a Chase bank branch or ATM. It does come with a $4.95 monthly fee, but that still makes it one of the cheapest cards available, Sekar said.

The Bluebird has no monthly fee, and activation is free if you apply online. Replacements are also free. The Bluebird offers one free ATM withdrawal each month; after that, you incur a $2 fee. Loading from a bank account or with cash at a Wal-Mart is free; loading with a debit card costs $2.

There’s a hitch, though: age limits. Most cards can be opened only by someone 18 or older. The American Express Bluebird allows a parent to create a so-called subaccount for a child, but the child has to be 15 or older. Even the SpendSmart card requires the user to be at least 13.  For younger kids, you’d be opening a card in your own name and then giving it to them to use.

Some other factors to consider:

Fraud protection. Most card issuers offer the same fraud protections on prepaid cards that they offer on debit cards, Sekar said, but they do so voluntarily; they aren’t required by federal law. That’s why it’s important to review a prepaid card’s terms and conditions agreement so you understand if and how you’re protected against fraudulent use.     

ATM access. Most cards allow you to monitor transactions online, but frequent use of the ATM option could leave you in the dark about where your child is actually spending money. You might want to set limits in advance about how often ATM withdrawals will be allowed, and for how much.

Cost for replacement. Kids lose stuff. (So do parents, of course, but perhaps less often.) If you have a spacey child, beware of any card that charges hefty replacement fees.

Customer service. Some prepaid cards have notoriously bad customer service, which can be a real problem if a bad guy or a merchant error drains the card. Make sure there’s a number you can call for help and that an actual human being answers the phone.

After doing this research, I decided to stick with those crumpled dollar bills -- at least for now. But I think a prepaid card might be a good transition between cash and a checking account when my daughter gets a little older.

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Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.

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