The next time you're out shopping, standing in line behind teenagers, don't expect them to fish out
a few wadded twenties as payment. If credit-card companies have their way, more teens will be using
their own cards, complete with their names embossed on the pieces of plastic, to buy
everything from the latest must-have pair of jeans to movie tickets.
Credit-card company representatives have been signing up card members on college campuses for
years. But in a new twist on the concept of plastic and young people, several credit-card giants,
including American Express (AXP) and Visa International, have developed cards specifically
for the high school set and younger. MasterCard International also has plans to launch a teen
credit card later this year, a spokesman said.
THEY LOOK REAL. The new cards look like real credit cards, but they're actually
reloadable stored-value cards that function like prepaid telephone cards, or those cards that many
colleges and universities issue to students for shopping on campus for books or food.
Credit-card companies describe the new cards, which debuted last summer, as an educational tool to
help introduce youngsters to personal finance -- before potentially debt-heavy habits kick in
during the college years. "It's a way to initiate the conversation about financial responsibility,"
says Steve Diamond, vice-president for stored-value products at Visa USA, including the teen
card Visa Buxx. Visa also is affiliated with two other teen cards, PocketCard and M2Card.
Desiree Fish, a spokeswoman for AmEx, describes the company's Cobaltcard for teens this
way: "It's definitely not a ploy to get them hooked on plastic. It's an opportunity to teach them
about financial responsibility."
CEMENTING THE RELATIONSHIP. But marketing experts say the new cards really are
about attracting new customers early on -- and for a lifetime. As Dominique Hanssens, a marketing
professor at the University of California at Los Angeles, explains, it costs financial-services
firms more money to acquire a new customer outright than to retain or expand a relationship with an
existing one. "And by tapping a teenager before [other] credit-card companies can tap him or her,
they are able to cement a relationship," Hanssens says.
Others on Wall Street say plugging into the teen market illustrates credit-card companies' need to find
new customers in a flooded market. "This shows how saturated the basic card market is," says
Meredith Whitney, a financial-services analyst with First Union Securities.
Others believe the new teen cards simply are about giving teenagers tools to shop online without
chasing mom and dad down for a credit-card number and expiration date. "I think the main purpose of
these cards is to help kids spend money online," says Janet Bodnar, a parent and author of
Dollars & Sense for Kids (Kiplinger Books, 1999).
DEBT AND USE RISE. Whether you view teen credit cards as a convenient, safer-than-cash way for parents to dole out allowances or cringe at the concept of combining plastic and precollege students, one thing is for sure: Credit-cart debt is climbing. The average credit-card debt per U.S. household was more than $7,500 in 1999, compared with nearly $3,000 in 1990, according to CardWeb.com, an online publisher of data on payment cards. And credit-card use is also rising. About half of all purchases in 10 years will be made using credit cards, compared with roughly 30% today and 15% a decade ago, notes Whitney of First Union Securities. So it was only a matter of time before we passed our plastic-happy culture on to our teenagers.
Here's how teen cards work: A parent usually adds money to each stored-value card, and the teen
buys stuff until the money runs out. Parents can refill the card over the phone or via the
cards' respective Web sites using a credit card or debit card.
The teenager can't spend more than the amount of money available on the card. In other words, the
card can't accumulate debt like a credit card. If the teen plops on the counter a pair of Diesel
jeans that cost more than the amount available on the card, the vendor will deny the transaction.
INTERNET SIGN-UP. Wherever American Express and Visa are accepted, so are the teen cards. Teens can even use them to withdraw cash at some bank machines. But applying for a card requires the involvement of a parent or guardian. In general, there are no application fees, and signing up via the Internet is encouraged. Parents and teens also can monitor account activity over the Web. And because these are stored-value cards, no one, including the teenager, is racking up a credit history.
But with no debt balance and no interest-rate charges, will the credit-card companies make money
from the teen cards? Yes, according to company officials. While keeping the details close to their
vest, these execs cite revenue streams from the new cards that include advertising from associated Web
sites, fees paid by merchants who accept the cards, interest from the money stored on the cards,
and various marketing agreements.
Whitney of First Union Securities notes more than 60% of AmEx' profits come from vendors who pay to use the company's card and participate in the card's network. So whether it's stored-value cards for teens or adult credit cards, more plastic in circulation translates into increased revenue. "The more hands [American Express] puts its cards into, the more money it will make," Whitney says.
TEEN BUDGETING. So, how does a parent teach a child to use plastic responsibly?
Finance author Bodnar and Marlys Harris, an editor for Consumer Reports, urge parents to
have a serious discussion about budgeting with their kids before signing them up for a card. Many
of the teen cards feature Web sites with detailed personal-finance tools. "Work on a budget. Ask,
'What does allowance cover? What are possible expenses?'" Harris says.
But who can make a case against teaching youngsters about finance at a time when studies suggest
financial literacy is declining among high school students? A study last year, for example, found
high school seniors knew less about personal-finance topics -- such as using a credit card, paying
taxes, or saving toward retirement -- than did their peers three years ago. The study was conducted by
the Jump$tart Coalition for Personal Financial Literacy, a nonprofit group that focused on financial competency for students before high school graduation.
If you're a parent interested in getting a stored-value card for your child, follow the process
closely. And if you're a teen, use it with caution. This new marketing gambit by credit-card
issuers could be a positive learning experience -- or the first step down the path to
fiscal irresponsibility. By Heesun Wee in New York