Credit Card Debt Essentials

Teenagers and Credit Cards -- Beware

Did you realize that credit card companies are setting their sights on the teenage population as their next great consumer group? Although most teenagers don’t fully understand the repercussions of using a credit card and the impact it can have on their future financial situations, it’s not stopping credit card companies from luring them in.

More teens are working full or part-time jobs and are spending their own money. Last year, youngsters shelled out $105 billion of their own money, compared with $94 billion in prior years, according to Teen Research’s survey of 2,036 respondents in demographically selected areas.

Because of this “rich” market sector, credit card companies, such as Capital One, are targeting high school juniors and seniors with a co-signed MasterCard that is solicited through the Internet and mailings addressed to their parents.

Because of this new trend of marketing to teens, one out of three high school seniors use credit cards, and half of them have cards in their own names, according to a 2006 survey by the Washington, D.C.-based Jump$tart Coalition.

The Capital One card has an alarming fixed annual percentage rate and no annual fee. Credit limits range from $200 to $1,000. The child gets the card -- and the bill -- in his or her name, but the parents are legally responsible for the account. Are teens prepared to take on the responsibilities of using a credit card? Jump$tart says teens aren’t ready for credit cards.

The group quizzed 723 12th-graders in public schools around the country on topics such as paying taxes, using credit cards and retirement savings. On average, participants answered only 52 percent of the questions correctly, a failing grade. They did worse than a few years ago, when 57 percent was the average score.

How to Help Prepare Your Teen

So how can we help prevent our teenagers from ruining their credit even before they reach college or find a “real” job? Most experts agree that parents should set up a program to help their kids understand finances.

Here are some helpful hints

First, make certain that the teen has a checking account. Teens should first understand the basic skills of writing a check and tracking money. After they have demonstrated the ability to balance a checkbook, let them use a debit card, which looks and acts like a credit card but is tied to the checking account.

When the teen has mastered those basics, apply for an extra credit card under the parent’s name on an account at a retail store or local bank.

Tell the teens how the card works -- starting with the connection between charging one month and paying the next. Emphasize that it’s not free money unless the balance is paid in full before the grace period expires. Explain interest and how it adds up if the debt continues to grow. Look at the fine print and review other key terms such as late fees.

Be sure to set some ground rules. Is the card reserved for emergencies or specific purposes such as clothes shopping?

Emphasize the importance of making certain the card is kept in a safe place, and what to do if it’s stolen or lost.

Set limits and supervise the teen’s usage. Monitor what happens when you give them an amount to spend, say $150 on clothes. Do they surpass the limit? If so, the parents should be prepared to penalize the teen.

Help develop and advance their level of responsibility. When parents feel the teen is ready for a card in their name, encourage them to shop around for low rates and fees.

Parents and teens should keep a close eye on limit increases by the credit card company. Just because the card has, for example, a $1,000 limit does not mean that it should be spent. With a limit that high, it could easily be increased to $2,000 or $3,000 within a six month period.

Parents should keep in mind that teens may apply for a card in their own name when they turn 18. Don’t be surprised to see credit card offers addressed to a son or daughter, well before their 18th birthday. Parents should keep and eye out for such offers through the mail.

With credit cards, parents must define what an acceptable purchase is. Pizza at midnight is not a proper purchase. Recently, fast-food restaurants did not take credit cards, and now it’s hard to find one that does not accept them. This could be a quick way to get into debt.

Parents should also remember that credit card companies who are reaching out to teens or minors with major credit cards must follow the same federal disclosure laws they do for marketing to adults. Whether they are selling by mail, telephone or the Internet, banks are required to reveal costs such as annual fees and finance charges.

Emphasize the importance of a good credit history and how a poor one can ruin their efforts to buy their first car or rent an apartment. Show them how to get a copy of their credit report.

Give the teen responsibility for paying all or part of their balance from an allowance or job. If the teens aren’t earning the money, it’s not a beneficial exercise. Most teens don’t really appreciate the value of money until they are out working hard and being rewarded with a paycheck.

The Internet, Teens and Credit Cards

Consumer advocates are worried that credit cards will give minors access to the Internet’s unsavory side -- pornographic Web sites, or illegal alcohol and weapons sales.