Credit Cards Targeting the Teen Market
by Joni Douglas
Joni @ RetireLike Me
Even before President Obama signed the Credit Card Accountability, Responsibility and Disclosure Act of 2009 into law in May of 2009, it was very apparent the credit card companies were targeting the teenage market. Sponsored luncheons, sales booths set up at student orientations, and free give-aways were just a few of the incentives used to hook teenagers up with a credit card. It worked too. In 2009, 87% percent of the students who used credit cards were only paying the monthly minimum payment.
By now I'm sure you have all heard the outrageous stories of kids applying for and receiving credit cards as young as 14 and 16 without a parent's signature. Back in 2003, a 6-year old filled out a random credit application from his mother's mail and was awarded a credit card without the parent's knowledge. These stories are rare and of course, not legal. They are not rare enough to go unnoticed, however. Teen credit was addressed in the new Credit Card Accountability Act.
Changes in the new law have affected how teens can get credit cards. Those under the age of 21 must now have a parent co-sign the application or show means of income sufficient to cover the payments. The definition of "sufficient means" is not supplied, nor is there an industry standard. And by no means is this a guarantee that your student can't get a credit card without your knowledge. As stated above, it was widely known that credit card companies were targeting the teenage market. What is not so visible anymore is that these companies did not stop the practice, they have merely changed tactics.
Even in this down-turned market, teenagers are still reported as having an ample amount of spendable cash. Between parents, allowances and part-time jobs, teenagers spend a lot of money. According to a Harrison Group survey, they shelled out $195 billion of their own money in 2006, compared with $94 billion in 1999. Go to the mall or any other popular teen hangout and you will see the truth in that. So the teenage market is a rich source for credit card companies with a constant stream of new possible clients growing every year. Given the spending habits and lack of education regarding the use of credit, the credit card companies are counting on teenagers to become customers for life.
It is not just the big credit companies either; stores with their own credit cards can be just as guilty. For instance, your daughter gets a job at a cool clothing store in the mall. The store offers her a fabulous discount if she wears the store's clothes while working. The catch? She can only take advantage of her discount if she uses the store credit card. It happened to my son when he was 16 years old while working in a national store with its own store credit card. This was before the new law, but even then a 16 year old was not legally allowed to apply for or receive credit without a parent's signature. I never even knew about the card until later. Naturally, he used it and looked great while he was working, but of course, he ended up in debt.
It may just be little things like the vending machine now accepting credit cards or the ease of shopping for school books online. But the messages are being sent to students and they are still listening. Even the points system is used to attract the teen, offering cool products for so many points earned from using his or her credit card. Specialty student cards with 0% interest rates to start - the details spelled out in small print - are the norm. How cool is it to have a credit card that highlights your favorite football team or a card all decked out with Hello Kitty? (What age group do you think they are targeting with a Hello Kitty credit card?)
Colleges and even high schools are now on the lookout for credit card pitches, many banning sales and booths on campuses and at school functions. With offers to sponsor school events and school sports, this can be a difficult offer to turn down for many cash strapped school districts and colleges. The credit card companies are getting creative; they find ways around it, like offering students money to get their friends signed up and giving away free T-shirts to all who sign. Might still be against the rules, but it isn't the credit card company doing the actual selling.
Although many believe that educating teens about credit should be the parents' responsibility, the thought of many parents is that perhaps the schools should add the subject of credit and debt into the mandatory high school curriculum. When the details of the credit card are written out in small letters and legal details, most teenagers, and far too many adults for that matter, ignore those warning labels.
Learning about debt and credit is important and every teenager should learn how to use credit responsibly. There are ways that a parent can help teach their teenagers and students about debt and about using a credit card wisely.
The following spells out options for parents looking for ways to utilize credit while teaching their teenagers about credit.
Starting teenagers out with checking and savings accounts is a great first step. Learning right from the start to put money into both accounts can lead to a successful savings and investing plan while still allowing for spending money. It is the checking account with a debit card that will allow your teenager to spend money while learning how to keep track of transactions. When the money is gone, he or she will have to stop spending. Many employers prefer depositing paychecks electronically as well. The downside of course, are the fees and overdraft charges that can and will result from not watching spending habits closely enough.
Many of the large credit card companies are pushing pre-paid cards as a means to allow teenagers to spend money yet learn how to use credit effectively. Some offer lessons in the use of credit and allow parents a good measure of control. This may be a good option for parents. Additional funds can be added as needed. The downside to this plan are the myriad fees involved. There is a setup fee, membership fee, and maintenance and withdrawal fees. Also noteworthy, this plan does not build any credit history for your teen.
Joint Credit Card or Authorized User
Co-signing for a joint credit card for your teenager will build credit in your child's name but you will be held responsible for the payments if your teen can't pay. Set limits can be applied to the card and both parent and teen have access to the card and the statement.
Adding your student or teen as an authorized user on your existing credit card is an option for some parents who are generous with an allowance. This will not build any credit history in the teen's name and the parent is responsible for the payments.
Secured Credit Cards
Tied to a savings account, this plan allows for only as much spending as what is in the savings account. If a payment is missed, the bank will automatically take it out of the account. Interest rates tend to run high on these cards and they vary at each bank or credit union, so check around. Spending is limited by the funds available, so out of control spending is not an option with this card. The teen also has an opportunity to build a credit history in his or her own name.
No matter what our intentions are, our children learn most from watching us. If we, as parents, have a high regard for being credit wise, our kids will pick that up from us. The reverse is also true, if we spend beyond our means or treat credit haphazardly, our kids may easily follow in those footsteps. It is a good idea to start teenagers off on the right path, not only learning the benefits of credit but how to avoid the many pitfalls of bad credit.