credit cards for teens

credit cards for teens

To many people, debt is an inevitable part of life. In President Bush's first official Tax Cut proposal he noted that the average family in the United States carries a credit card debt burden of $4,000!

That is just credit card debt; it does not include mortgages, car loans, student loans, personal lines of credit, personal loans or other big-ticket debt items. When you factor in all debts, the average family carries a much more startling burden, with an estimated 78% of total income going to pay off debt.

Still, credit card debt is often the most vicious sort of debt, with high interest rates, compound interest calculations and revolving credit. Most credit card consumers keep on acquiring debt even as they make payments. The matter of compound interest means that an individual who makes only minimum payments on an average credit card with an average interest rate (currently between 17% - 21% annually) ends up doubling their debt every 4 years! It is inconceivably hard to "get ahead" of credit card debt. It is incredibly easy to fall into the cycle of "buy now pay later" credit card convenience.

With this in mind, one has to wonder what has prompted the big credit card companies to create "secure" credit cards for teens. Is it not bad enough that so many adults struggle with credit card debt, do we need to acclimate the next generation to the misleading ease of the pay-with-plastic system? Are credit cards for teens an idea whose time has come, or a way for greedy corporations to tap into a lucrative and yet, financially unburdened, demographic?

Credit cards for teens are "secure", which means that they work more like a bank account with overdraft protection than a credit card. A "secure credit card" is really just a bankcard that is accepted like a credit card. When you use a "secure" credit card it is pretty much the same thing as writing a check only the amount that you "charge" comes out of the account immediately. You aren't so much acquiring debt as acquiring convenience.

With a secure card you pay up your limit, adding money to your account before you spend it. With credit cards you are given a credit limit, in essence an open interest barring loan, and you pay down what you borrow each month. In theory, since secure credit cards require regular deposits rather than payments, there is no debt being incurred. In practice, this isn't always the case. There are scenarios that can occur that make secure credit cards not so secure.

When you buy something using a credit card the merchant has discretion as to whether or not they wish to immediately verify the funds and post the charge. For instance, when you go to buy something using a credit card, if the purchase is small, like $20 or under, a merchant may decide to post it at the end of the day rather than at the moment of purchase. Money is only taken from the secure card account once a transaction has posted, which is where problems can arise.

If a merchant waits to post the charge and you continue on with your shopping, it could end up that you inadvertently over-spend. When that small purchase is posted at days end, the secure credit card company may allow the charge to stand even though you no longer have enough funds on the card. When they do this you will pay interest in the form of a "fee" or "penalty". Your card carries a negative balance and puts you into overdraft until your next deposit. Voila! Your "secure" card just put you in debt.

When you make your next deposit, the debt is deducted before your available spending limit is declared. The small debt is paid in full along with the assessed fee. So, although you rarely end up in heavy debt from this practice, you do end up borrowing money and paying for the privilege. If a million teens do this each month, and each teen owes only $2 in "fees", this can end up making credit card companies a whopping $24 million each year!

How is this possible when laws do not permit lending money to minors? It is possible because technically, parents own the secure credit cards "for teens." Your parents can incur debt. When you sign up to get a teen credit card you must have your parents permission and they are the ones who must make the deposits, even if the deposits are money you have earned. The contract for the card exists between your parents and the credit card company. These cards are marketed as being "for teens" when they are really "for parents." This is how it is possible for debt to accumulate on these "secure" cards.

There is another way that you may end up paying for the convenience of these cards. It is possible to make cash withdraws on secure cards and when you do you will be charged a fee. When your parents add money to your account and you take out some of that money in the form of cash, you end up paying another fee. Had your parents just handed you the funds there would be no fee attached. The card companies win. By acting as a "middle man" the card companies make money and in the process introduce you to the idea of "cash advances", a staple of consumer credit card debt.

The credit card companies are targeting teens with these cards, but there is no mistake that liability lies with the parents. Visa Buxx, one of the first such cards, makes no effort to hide the truth. Just look at the description of the card that appears on the corporate web page, "parent-controlled, re-loadable payment card designed to help parents provide spending money for teens and to help teach teens practical money skills."

But will these cards teach teens "practical money skills" or will they just get teens used to the idea of making purchases using credit cards. After all, using one of these cards is exactly the same as using a credit card. You produce the card, the merchant seeks authorization, you sign a receipt and you get a "spending habit" statement. It is like "play credit" that gets teens used to the way it feels to use credit cards without actually giving them credit. It is easy to see how opponents to these cards feel that the real agenda is lulling teens into a false sense of security about credit card use.

credit cards for teens