credit cards

Educating teens about credit

Prepaid or stored-value card 
If this setup gives you nightmares of your teen debiting away his college funds, you (and he) might be better off with a prepaid card or stored-value card. Not linked to a bank account, this variation on the debit card -- Visa Buxx is a well-known example -- sets even firmer limitations on spending. Parents activate the card by loading it with an appropriate amount of money. Other authorized adults, such as Uncle Joe or Grandma, can also add funds for birthdays or Christmas or when they see fit. Then Mom, Dad and the teenager can keep an eye on expenditures via online statements. "Stored-value cards are basically cash," says Mark, "so they're easy for kids to understand."

As a result, it's no surprise that stored-value cards are marketed overwhelmingly toward the teen demographic, and each uses a slightly different marketing angle.

MasterCard's affinity-based MYPlash features images of pop musicians, rockers and athletes, while hip-hop mogul Russell Simmons' RushCard offers tie-ins with mobile phones and discounts on clothing from his Phat Farm line and his ex-wife's Baby Phat label. Paychecks can also be deposited onto the RushCard.

The Allow Card, a MasterCard-branded prepaid card, aims to educate teen cardholders by e-mailing them a monthly "financial lesson." It also offers parents 35 controls, including the ability to block certain types of merchants so that teens can't shop at undesirable places.

MasterCard-branded PAYjr operates on the allowance principle: Parents deposit a teen's allowance onto a PAYjr card, and both parent and teen can monitor use online. For kids 12 and younger, PAYjr has a savings program tied to chores: Parents set up a list of chores and due dates; once the chores are completed, the payment is automatically deposited into a savings account. UPside card, a Visa-allied card, is a prepaid card that can be used online, in stores and at ATMs. It also has a points program that allows users to get cash back.

All of these stored-value cards have one major drawback: Just about every action entails a fee. For example, U.S. Bank charges its Buxx customers for enrollment, balance inquiries, reloading or replacing the card and assistance from a bank teller. And here's the one-two punch: If you don't use your card for a few weeks or months, you'll get socked with an "inactivity fee."

Allow Card has a $19.95 activation and "lifetime membership" fee, and fees for ATM withdrawals ($1.50), monthly maintenance ($3.50), balance inquiry at point of sale ($0.25), and others. There are no fees for point-of-sale purchases.

With these examples in mind, be sure to check the terms of a card before you and your child sign up for one.

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Revolving credit
"The basic principles of spending money come long before the first credit card," says Mark. "There's a whole collection of related topics: the value of a dollar, the time value of money, interest, the idea of saving toward a purchase." Armed with that understanding, teens are ready to graduate to credit cards -- something they should do before graduating from high school, according to personal finance experts.

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