The credit card industry is no longer allowed to solicit youth under the age of 18 for credit card offers but that isnt necessarily stopping the card industry from trying to make a profit off young consumers. As any parent and many marketing experts know, the youth consumer market is enormous. There is rarely a child that hasnt nagged a parent for something, anything off of the store shelves.
Savvy credit providers have found a way to tap into the teen and pre-teen market with their marketing push for prepaid debit cards. In most scenarios a parent still has to be involved in getting a pre-paid card for their underaged children but these debit card products are being marketed ubiquitously in grocery stores, convenience stores and in numerous kid-accessible locations.
Additionally, in this day and age when there are so many options available, relatives who are unknowledgeable in the world of kid gifts often purchase pre-paid credit cards in lieu of a gift. The marketing push for prepaid cards may seem harmless to some but they can present problems that are counterproductive financially, especially for kids.
Whats the Consequence?
One of the things that the new CARD Act legislation has changed is prohibiting kids under the age of 18 to get a credit card on their own. With no documentable income for many of these kids obtaining credit cards, a massive amount of untold debt had become irreconcilable for the parents who were ultimately responsible. Now that age limitations have been imposed along with stricter underwriting guidelines, delinquencies have shown a precipitous decline according to financial experts. Concerns facing the younger generation, however, still remain. Despite the new legislation, kids as young as 13 may still be legally eligible for a prepaid credit card.
Pre-Paid Is Not Always a Viable Alternative
Todays kids are being exposed to more progressive changes than previous generations thanks to all the information, technology, and societal changes going on. Kids now have much more sophisticated resources at their disposal, despite the fact that many young children lack the sophistication required to go along with those resources. Many kids do not have a solid understanding of credit and its consequences, stemming from their upbringing or our own culturally slanted dysfunctional tendencies towards credit.
In addition to the basic principals behind finance, most kids have no idea about how much a prepaid card costs. They might have that $50 to deposit on a card but few recognize that with maintenance and transaction fees imposed by these card issuers, their 50 bucks goes faster than they can say Justin Bieber. Most prepaid cards charge monthly maintenance fees, activation fees, transaction fees, inactivity fees, ATM fees, and even a “reload” fee assessed when more money is added to the card. As an example of how prepaid cards work, lets say a child has their sights set on a $20 video game and a $20 DVD. They have $50 to spend on a prepaid credit card courtesy of Aunt Mary. They rationalize that with $50 and $40 in purchases, theyll have a cool 10 bucks left over.
Here is a breakdown of the typical costs and fees for a prepaid debit card:
$50.00 initial purchase
-$10.00 fee for enrollment/activation
– $3.00 maintenance fee
– $20.00 purchase made
– $2.50 transaction fee
$15.50 **Not enough funds left for the second $20 purchase. Requires reload of funds**
+ $30.00 deposit (courtesy of mom and dad)
– $2.50 reload fee
– $20.00 second purchase made
– $2.50 transaction fee
– $30.00 reimbursement to mom and dad (yeah, right)
– $19.50 in the hole
Kids that do not understand the true costs of a prepaid card will likely have a hard time managing a traditional card at the age of 18 without a solid foundation in how credit really works.
Parents should start as early as possible to teach financial responsibility on an age-appropriate level. Starting with a preschooler, parents can start simply by adding spare change and birthday money to the child’s piggy bank. When a child reaches elementary age, a trip to the bank to establish a savings account is a good way to reinforce the importance of saving some if not all of the money from that piggie bank.
As a child gets older, additional age-appropriate financial responsibilities should be established. Chores, for example, can earn a predetermined allowance and that allowance can be used to pay for kid-friendly luxuries that Mom and Dad don’t want to buy. When a child reaches high school, driving will likely be the next big financial lesson when teens discover the true cost of driving and how to be responsible for vehicle maintenance, repairs, registration costs, insurance and gas. The savings account at the bank should still be growing through regular deposits and working teens can be introduced to the ins and outs of a checking account, writing checks, and reconciling bank statements.
Long before a credit card is introduced to a teen, a solid financial foundation should already be established by their parents. Traditionally, many schools don’t teach even the most basic financial management skills so it is up to a family to develop financial smarts at home. Once a child reaches colleg-age, financial lessons learned early on will likely be carried over into adulthood.
The next time your kid asks for a credit card, even a prepaid one, consider whether or not they are ready for such financial responsibility. In truth some kids who have been taught ongoing financial basics may just be ready to meet the challenge of managing a prepaid card. For those not yet experienced in the basics, it may be the ideal time for parents to start building a foundation before a child takes matters into their own hands.