Teen Credit Cards

Stacey from familylifebydesign.com gave me a heads up last week on a new product being peddled by Discover. While I like the Discover More card for grown-ups, I am not fond of the new product aimed at teens, and here’s why.

The new Discover Current card is being sold as a debit card alternative for teenagers. Parents can load money on to the plastic via their own credit card (wonder if this counts as a cash advance), and can place limits on how much can be spent and where it can be spent, all the way down to individual merchants. All this for a $5.00 monthly fee.

According to the Discover website you can even “browse Teen Card designs that are way cooler than cash.” It makes for great marketing speak, but it made me stop and reflect back on my own years as a teenager and wonder, when did cash stop being cool? I can distinctly remember how it felt to get my first $20 bill. I thought I was rich!

As an early teen I spent a summer day at my great aunt’s house installing a mailbox and post, and doing general yard cleanup on her property. At the end of the day she gave me $20, and I felt like a million bucks! I resisted spending that $20 bill for quite a while simply because I liked seeing it in my wallet. She could have given me a piece of plastic with a fancy design on it and the feelings of excitement would have turned to, “What am I supposed to do with this?”

Thanks to years of Visa and Mastercard (and Discover) pushing their products down to our youth, and our youth watching their parents use and abuse the same products, kids know exactly what to do with plastic these days – swipe it! The problem is, they don’t see Mom and Dad opening the bills and the end of the month in tears wondering how they are going to come up with the minimum payment. It is a one-sided view, an incomplete picture into the world of credit.

No, I would rather my kids grow up thinking cash was still cool. I pay my kids allowance and commissions for extra jobs in cash, and will resist giving them plastic as long as paper currency is still a legal tender. Call me old-fashioned. I just don’t think kids are able to fully grasp the transactional differences in swiping plastic and watching that $20 leave their hand and receiving $0.70 in change back.

It hurts to spend cash. It is supposed to hurt. We are exchanging our money for some good or service. That is money we worked for, or saved for, or could spend on something in the future. Instead, we are trading it in for something we feel is of equal value today. These concepts are difficult for many adults to understand, and something I didn’t really “get” until my late twenties. Why do we expect young teenagers to get it before we did?

Some will make the argument that giving teens a product like the Discover Current card will help them learn budgeting concepts, and how to use plastic wisely. Maybe. But I’m not convinced. Besides, how can teens learn these concepts when parents have restricted purchases to certain merchants, or blocked ATM transactions, or only allow them to spend a certain amount each day.

One could make the argument that normalizing the use of plastic too early could be dangerous.  I would tend to agree with this argument. I read a great analogy once (I think it was from Trent at TheSimpleDollar.com) that compared credit cards to power tools.  Sure, they make things convenient, but they can be dangerous in untrained hands.

If my son wanted to cut a piece of wood at eight years old I wouldn’t mind helping him guide a handsaw, but I wouldn’t fire up the skill saw and hand it over to him, even though he will use it when he gets older and it is more convenient and “cool.”  I know, I know, kids aren’t going to lose any fingers over swiping a Discover Current card, but they just might grow up with bad habits that cost them their financial future.

I believe it is good for kids to go through a few cycles of earning money, blowing it all in an afternoon at the mall, and being broke until the next Friday when they get their allowance. Eventually, they just might learn not to blow all their money on “payday,” and will hold some back for the next week. But if parents artificially manage this for them using the card’s technology, how will kids ever learn to budget their money?

For now the only Discover credit card in our household will be the one I use to buy gas. When my kids are old enough to apply for their own card, and they are earning their own money, then maybe they can have one, too. But for now they will stick to cash for spending and handsaws for cutting.

Comments

  1. I wholly agree that cash is the way to go with teenagers (or young people). Many industries do what the credit card companies are doing – you first convert the currency into something “neutral”, then it no longer means anything so you can spend it guilt-free. The casinos have you convert your money into plastic chips, arcades have you change your coins into tokens, county fairs have you change your money into tickets, and the list goes on. The best way is to deal in cash. Yes, it’s painful, but it’s supposed to be that way.

  2. Ages ago I saw an Oprah programme where a group of young people worked to get out of debt. I saw the last, the whole thing had taken – I think – a couple of years. Only one young man hadn’t made serious inroads into/got rid of their debt. His parents had paid it off at the start of the project and by the end he had run up a debt even greater than the original.

    Anyhow, there was something a young woman said, she said that part of the project was to pay for things with cash. She said that handing a card over in exchange for a pair of shoes could be done with no thought, it was easy – but a hundred dollars in crisp notes – that was a whole different matter!

    Nuff said!

  3. I am so totally on-board with you – cash is the way to go. It can be difficult enough to learn to manage money even with tangible cash. To learn the value of, and how to manage finances via plastic is far too abstract – even for some adults I know!

    No, my son will use cash money for as long as possible. “Old school” is very often still the best school.

  4. Dude, you nailed this right on the head. It really gets my blood pumping when the credit industry as a whole targets teenagers with marketing. It’s about time we stood up and voiced our concern that this is not the direction we want to continue.

    The longer we can keep our children sensitized to the value of money, the better off they will be financially for the rest of their lives.

    Keep it up!

  5. Remember candy cigarettes? This card sure reminds me of ‘em. This is surely an attempt to get our kids addicted to plastic just like the tobacco companies worked hard to get the kids on smokes.

    Well done FD!

  6. Just to bring up a point that may have been missed, in this age of cell phones with GPS tracking for worried parents, having their kids use a credit card “allowance” instead of cash also means that they can track what they spend their money on. Cash can be used to buy questionable things like drugs and other illicit material. (It’s well known that over 50% of teens have at least tried some sort of drug.) Having them restricted to a credit card does mean that they are limited in the sorts of things they can purchase.

    Bad habits are bad habits and using the argument that credit cards are somehow worse is not justification for not utilizing them as the financial tools they are. Kids can learn bad habits with cash just as easily as with a credit card. It is all up to their attitude and what/how they are taught. Especially in this day and age where even we, as adults, never even see our own paycheck anymore (direct deposit). As it is, I never touch cash unless I do a debit card purchase and get cash back. I use my debit card and checks for everything now. One has to learn how to manage “virtual” cash sooner or later — preferably sooner.

  7. I do agree with you that kids need to learn to manage cash first. But…I also think kids need to learn to manage credit as well.

    Part of my experience learning about credit was getting a credit card with a $100 limit from a store and learning to pay that off each month. I think this teaches the same concept (although I’d find one w/o a $5/mo fee!).

    Most of my debt is non-credit card related at this point. And when it was, it was medical emergencies and vehicle issues that went on the cards, not shoes and makeup – because I had previously learned to manage a credit card.

    I don’t think we should let kids walk into college and learn about credit cards on their own. It makes it too hard for them to listen to that voice that tells them a $6 pizza is going to cost them $20 with interest over time.

    I think the more proper approach is showing the teenagers the “paying bills” portion and including them in that to show them the plastic is real money. Then they won’t get the attitude a swipe isn’t real and it doesn’t cost them.

  8. I understand giving a teen a debit card: it’s roughly the same as a checking account. Yet unless they understand the fact that all their hard-earned dollar bills get sucked out of the account every time they swipe that card, there’s nothing to prevent them from overdrawing the account. I think the key element of training is to get them to value cash. Part of that is to make them actually work for the cash. I think it should start early, and also the young person shouldn’t be given adult wages. The harder they have to work for that dollar, the more they will like it and the better they’ll think it through before spending it.

    I know many people who, when young, were indulged financially and not allowed to experience the consequences of bad financial decisions. Many were also given too much money too early, or they were paid wages that were out of proportion to the value of the work they actually did. This led to a lack of understanding of the value of their work and an over-estimation of their own talents and merits. It also created an appetite for money they didn’t earn and a feeling of entitlement.

    It’s an awful bore to be around someone who feels entitled to the results of other people’s labor but who does not understand the need to give something of equal value in exchange. That sort of person is likely to try to stick you with the dinner tab. I wonder if people would have a less entitled attitude if they knew there were social consequences?

  9. I agree that cash is the way to go. We should also show them the credit card statements and espeically the “finance charge” section….it’s usually money spent plus interest.

  10. This is terrible. We need some tighter legislation around what the credit card companies are allowed to do.

  11. This is one of the few times I’m in full disagreement with your stance.

    Perhaps I’m bit younger than most readers (25), but I see cash as a hassle in these days. I have all my funds direct deposited. Obtaining cash requires I either drive to my bank, hit an ATM, or do a cash-back transaction from a merchant. There are negatives to each.

    My point is that the use of cash is exiting as the normal means by which transactions are conducted. This is the environment a teen will be in when they become responsible for their own financial futures. I feel it creates an unrealistic environment if you stick to cash after a certain age.

    At a certain age, I feel you should give them the (Debit) card. Give them access to the website to check balances. Communicate that it is *EVEN MORE* important to have a clearly defined budget now that they don’t see the physical bills diminishing in their pocket. If you want to add on lessons for credit add on some (~$100) of overdraft protection.

    This is what my parents did. I think I’m all the better for it because I learned it in my teens rather than in my 20s: like most of my friends.

  12. DavidK, the world changes, but not always for the better. To counter your example, just because everyone and their dog has a cell phone does mean that’s a good thing. Cell phones steal the independence and rationale from those – especially kids – who carry them.

    Credit cards are far too abstract and make frivolous spending far too easy. If more Gen Y people had grown up learning to manage their finances with actual cash, the U.S. might not be in quite such a fiscal mess.

    And I agree with Alger – credit card companies actively wooing teens is predatory, opportunistic, and unethical.

  13. When I was in high school, my parents allowed me to get a credit card. In my case, it had nothing to do with some fancy ad I saw, but the idea was actually encouraged by my parents. Maybe I’m in the minority here, but I think it was a great way for my parents to show me how to be responsible when using credit cards. I was never wild with it and only used it for getting gas or food somewhere with friends.

    Ultimately, my use of credit cards in my teen years has resulted in me having a positive handle on my finances today. I think it is crucial that if you allow your children to have a credit card, to have complete oversight of any and all purchases.

    Stupidly Yours,

    Matt

  14. I’m in agreement with Brian Dirk here. 16 years ago, many people looked at cell phones and said “I’ve got a phone in my house and at my workplace so people can call me at any time. Why would I need another phone?” Now, every single person I know has one in their pocket, purse, or hanging off their hip. The world changes, and in this case, it is changing to electronic money. Be it debit, credit or direct deposit, people are handling less and less actual cash.

    The real issue with credit cards is treating them like free loans that you’ll pay back at “some point in the future”. Teach kids the importance of this distinction rather than focusing on whether they use a plastic card or paper cash to make their purchases.

  15. I have mixed feelings on this issue. I feel like most things it depends on how a parent handles the situation. Someone said cash can be used for drugs and this could prevent that, someone said this won’t teach the kids the value of the dollar…but I think people forget that it’s the parents job to teach and be examples. Kids using this card is not what give kids bad values. Everything needs to be used as a tool, and if looked at in the right way this could also be looked as a tool. You could even teach budgeting with this card. You have such and such amount on the card, what are you going to do with it? Save it for something big, spend it on little stupid things? it could go on and on. The bottom line is that parents need to do just that…parent.

  16. With the “current state of the economy” I think it’s even more important to teach kids that if you can’t afford it-you can’t have it. This sounds like it helps with that. Then again it also sounds like the newest wave of parental micro-management. On the one hand it sure would make it harder for the kids to buy drugs. On the other hand I work with kids and even if you tell them how much where to shop, I know they are innovative enough to “fix” the in place system.

    If this was like the game of rock-paper-scissors I think paper would beat plastic any day. I’d like to think I can give a kid $50 and there’s a chance some of it might end up in a savings account somewhere.

  17. I find it interesting you used the power tool analogy the way you did. I agree- don’t hand over the super power saw first (credit card). Train first with the hand saw (cash). But I think you missed the fact that at some point you WILL need to show your kids how to use the power saw. I would think its better to first teach financial responsibility with cash and THEN, before they go to college, teach them how to use a checking account, debit card, and credit. Otherwise, they will end up getting one on their own in college and you’ve lost the chance to help them learn and make mistakes that won’t ruin their credit future for years.
    Yes I do think Discover crossed the line in marketing TO the kids, but I don’t disagree with the product. They probably should only market to parents, and focus on kids 16 . But,why wouldn’t you want to teach them kids to responsibly use credit before they get to college?

  18. I think it all boils down to the kind of relationship you have with your kids. I grew up very indulged and was given a credit card when I went to college. I went nuts with it and my dad paid the bill. What did I learn? That dad pays the bills. I had a VERY hard time in my 20s learning how to manage money and quite often turned to parents for a bailout.

    I was bound and determined not to let this happen to my own kids. I wanted them to learn how to be responsible with their OWN money — not just to learn how to spend mine. I have made my kids active participants in modeling to them where our money comes from and how our bills are paid. Just this year we had a big talk on “return on investment” when deciding what activities they would participate in vs. how much money we had to spend for said activities. They chose what they wanted to do — cutting out the high-dollar activities that didn’t really gain them anything.

    I am sure I will get flamed for this, but I have given each of my kids their own credit card on my account. They understand how the cards work. They aren’t magic fairy-land cards, but utilize real money that comes out of their bank accounts. (ie: I take money out of their accounts to cover what they have spent on the cards) They have been VERY responsible with these cards — asking me how much they are allowed to spend before they swipe. I have been very glad to teach them this kind of responsibility and the cards have been very handy — I live in a very rural area that makes it difficult to get to a bank to get cash on a regular basis. So when they were in school and would go on a field trip and were stopping at mcdonald’s for lunch, they knew they each had so much to spend. They have been very responsible and never went over that amount.

    I use my own credit card like a debit card — I charge everything on it to get the cash back points and pay it off EVERY month. No exceptions. I check it online each day to see how much I have to spend based on our monthly budget. This works out very well for us.

    I am a firm believer that if we don’t teach our kids how to use a credit card, when we have control — how can we expect them to handle themselves when they are on their own?

    BTW– to this day I am still afraid of the power saw because my dad would never let me touch one. I wish I would have had a chance to learn how to use one responsibly so I wouldn’t be afraid of it today.

  19. Like I said, I’m old fashioned. I’d like to see less of us using credit cards, so why would I want to encourage my kids to use them?

    I don’t think kids ought to get a credit card in college because most kids in college don’t have an income. I will strongly discourage my own kids from getting one and repeating the mistakes I made. Yes, shame on the credit cards for offering cards to people without an income to repay, but if we spend the last four or five years before college loading money on a card for them to use without working for the money, how does that prepare them for geting a Discover Card at a football game with a free t-shirt and a $2,000 credit limit?

    There’s really no right or wrong answer here. It does depend on the kids maturity and financial discipline, and the parent’s overall feelings toward credit cards. But I don’t really subscribe to the theory that giving a credit card to a teenager helps them because “they will just get one anyway.” If that were the case we would give alcohol to teens so they can learn to drink – after all, they are going to do it anyway. No, we can teach them that it is possible to live a fulfilling life without drinking alcohol, just as it is possible to live without credit cards should they decide to do so.

  20. I absolutely agree that this is a bad idea. Using a credit card gives them no true sense of the money they are spending. That’s the same reason so many adults get themselves in credit trouble.

  21. Credit cards de-sensitize people and create bad spending habits, IMHO. And introducing kids to plastic is NOT the way to teach them about money. Sounds like this one wouldn’t teach them anything, with it being so automated.

  22. My thoughts:

    1. Younger generation will understand money as abstract and electronic faster, better, and easier than we have. Think the transition from money as precious metal coins to paper money (which you realize has no actual value either are a nothing abstract representations of value – paper money has its origin as credit slips for precious metal; look up the history).

    2. Let ‘em screw up young, then they will learn young. Probably everybody gets into credit card debt no matter what their parents teach, and better they do it with $2K credit limit than $200K credit limit.

    3. It’s easier for a kid to buy Oxycontin with cash than a card. And harder for Daddy to catch on.

    4. A debit card achieves all of these purposes and has no debt component.

    5. Didn’t there use to be a law, at least in the USA, saying you had to be 18 to get a credit card in your name? I’ve even heard of people using credit card as proof of age.

    6. A teenager would probably be ridiculed at school for carrying a Discover card. As a fashion statement, it is about one step higher on hipness scale than carrying crumpled Andrew Jackson’s. American Express doesn’t have a similar program?

  23. I’m not going to comment on Discover’s product but on some of the more general points….

    For me, cash stopped being cool when I realized that, uh, you can’t buy much with it. What, am I supposed to shove a $20 in the floppy disk slot to pay for something on the Internet? Remember, teenagers often have no transportation outside of their parents graciously sacrificing their time to give the teen a ride someplace. (Never mind the other reasons you might want to buy something on the internet.) It was such a hassle every time I wanted to buy something. And, no, having it be a hassle to buy something is not a good thing.

    I never saw how a bunch of paper and metal pieces representing a concept was any more tangible than a number on your computer screen representing the same concept. Physical currency is a waste of time, space, and resources, and I can’t wait to see the day it becomes limited to collectors’ items.

    Having recently been one, I am miffed by your treating of teens as morons.

  24. It seems that sometimes people think that a person (whether they be college-age or older) will suddenly wake up one morning and understand how credit cards work. Teaching teenagers the value of cash is important, but I think teaching them the link between actual money and plastic is equally important.

    Some kids may be able to learn the ins and outs of credit by listening to an explanation by mom and dad, but other kids will need to experience this on their own. For the later group, a credit card of their own would be a good teacher – provided it’s their own money that pays the bills!

  25. When I graduated from high school, my parents gave me $500–in $100 bills (the same applied to my siblings). My dad had a boss who used to pay out the bonus in cash, rather than a check. The boss knew that people rarely get a chance to handle that much cash, and it made the gift more special. My dad applied that theory to our college graduation. While I soon took the cash to the bank, for those days I had it, it was pretty cool. I’ve gotta admit, I still like it when I get cash.

    My parents put me on one of their credit cards when I was in high school and went on a school trip. They didn’t want me stranded. However, it was very clear–without a lecture–that it had to be a real emergency before I used it.

  26. We got our daughter an American Express card for a few reasons. First and foremost, they won’t let you do it until they are a certain age, (at least 17, I think,). Second, and most importantly, it is directly tied to their SS#. Third, as the parent, you can ‘boot’ them off of your account anytime and you are not responsible for their charges. Fourth, she was about to enter college and needed something for emergencies. Fifth, she understands that AmEx is a card that HAS to be paid each month-that means no surprises.

    I feel safer that she has something in her wallet that she can use if she needs to. We have authorized one gas fill up per month, no questions; after that she has to call us to get an ok. Interestingly enough the only other time she’s used it was for buying books online.

    I feel that this is a great card for establishing credit, as well as giving mom some security for something ‘bad’ happening that she needs bigger money for.

    What do you think, Frugal Dad?

  27. We got our daughter an American Express card for a few reasons. First and foremost, they won’t let you do it until they are a certain age, (at least 17, I think,). Second, and most importantly, it is directly tied to their SS#. Third, as the parent, you can ‘boot’ them off of your account anytime and you are not responsible for their charges. Fourth, she was about to enter college and needed something for emergencies. Fifth, she understands that AmEx is a card that HAS to be paid each month-that means no surprises.

    I feel safer that she has something in her wallet that she can use if she needs to. We have authorized one gas fill up per month, no questions; after that she has to call us to get an ok. Interestingly enough the only other time she’s used it was for buying books online.

    I feel that this is a great card for establishing credit, as well as giving mom some security for something ‘bad’ happening that she needs bigger money for.

    What do you think, Frugal Dad?
    P.S. – Sorry, forgot to tell you great post!

  28. You know I checked out that Current Card (by Discover) you began with , and it is actually much better than cash! There is no credit check (so it can’t hurt a teen’s credit), and I can monitor and restrict my teen’s spending. They have an option to restrict certain types of purchases, such as Alcohol and Tobacco. There is even a promo code for the first month free! (EX4091)

    Plus, by loading the card with my own Discover Card (or another rewards card you may have), I actually earn cashback on the deposited amount!

    I seriously suggest trying the card out for your teens. It is perfect for new drivers who need to get gas and groceries.

  29. Perhaps the issuer is taking advantage of the latest trend in spending as reported recently worldwide.

    Debit card has suprisingly grown leaps and bounds since the financial crisis.

    For example in Australia, there is a growth rate of 16% for debit cards in 12 months in 2008 if compares to 2007.

    MasterCard Australia has also reported increase in application for debit cards while credit cards application has decline.

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