Credit Card Companies Woo Teens with PlasticCredit card companies are targeting children as young as 13 with products that allow them to pay with plastic instead of cash. Parents can monitor their children's spending habits, but there are potential pitfalls if users aren't careful.
The latest Federal Reserve report shows consumers kept spending on credit cards, even as confidence in the economy was faltering. Now credit card companies are wooing teenagers as young as 13.
Sharon Epperson, the personal finance correspondent for CNBC, talks with Renee Montagne about the buy-now-pay-later culture.
Credit card companies have created new products for teenagers specifically, saying they shouldn't be left out of the credit economy. What are these products?
There are special cards, like Visa Buxx cards, the Allow Card from MasterCard, that allow you to put a certain amount of money on a card for a teenager. So the parent is in the game with the teen. But this is a way so they are not just given a credit card, [but] for them to have some form of plastic that they can use to make purchases, almost like a gift card would work.
So it's a little like training wheels. But even though the parents do set the limit, do you think teens are likely to spend more with these cards than if they had the traditional cash allowance?
I think it can be a very dangerous game if you do not educate your child before giving them a card like this — any form of plastic. I think it's very wise to start with just cash and carry: Whatever you make in babysitting or in a part-time job or whatever allowance I give you, that is the money that you have to save and to wait before you buy the iPod. You can't just go and get it on credit. Or you cannot just go and get it with one of these prepaid cards.
It's very important to teach young people the importance of saving, of knowing about how to manage their money. So many adults have not spent the time in figuring out what it really means to have a credit card; what are the interest rates, what is the minimum payment amount and how long will it take me if I just pay that little bit every month? Education must start at home with the parents first and then them educating their children.
But that education, you're saying, doesn't come from the cards themselves.
The card companies are definitely interested in making sure that teenagers know what they're doing and work with parents on it. And what they talk about in promoting these cards is the financial education component that goes along with it. You can monitor your child's spending habits. And so, yes, that is a good thing, but you still need to know the basics of how credit works before getting involved with these types of cards.
Of course, teenagers will eventually need to build up a credit history. Eventually all people will need it for loans and mortgages. Do credit cards work in building up a credit history for kids?
They work if you pay them off. The problem is a lot of young people do not understand what debt is about. And so who is paying off the credit card — is the child paying off the credit card or is the parent doing it? Many surveys out there show that a lot of times young people don't even understand what debt levels they have with their credit cards.
So it's important to establish credit, yes. Once you're 18, a credit card is in your own name and you're able to establish credit that way. And if you have already been on a good track of paying the balance in full every month, of understanding what the fees are, of understanding the interest rates, certainly that is a good way to build credit.
It's not a good way to build credit, though, if you're using this as just funny money, not realizing the interest rates, the fees attached to it, accumulating credit card debt and then — as many young people that I've interviewed have gone through — then at 22 saddled with $10,000 in credit card debt. That is not going to increase your credit card score.
Sharon Epperson is the author of The Big Payoff, a book about financial planning for couples.
Read tips for preventing financial disasters using credit cards.
Limit yourself to one card. Having more than one card tempts you to overspend.
Pay your bills on time. Avoid late fees, a penalty-rate annual percentage rate (APR) and the threat of a poor credit rating.
Pay your credit card balance in full each month. If you can't pay your credit card bill fully each month, always make more than the minimum monthly payment.
Never use one credit card to pay another. If you only have one card, you won't be put in this dilemma. But if you do have multiple cards, this is a cardinal rule. Use savings, responsibly borrow from family or friends, or talk to your credit card issuer and ask for help.
Differentiate between wants and needs. The convenience of plastic makes it easy to overspend.
Avoid exceeding your credit card limit. You can face over-limit fees or risk having your low APR replaced by a higher rate.
Avoid cash advances. Except in the most dire emergency, do not request cash advances. They are usually expensive.
Use student loans, not a credit card, for tuition. Student loans are far more cost effective for tuition.
Don't skip payments, even if your credit card issuer says you can. You will be charged full interest during this period and will end up owing more the following month.