Giv­ing teens credit

Are pre­paid cards and credit cards aimed at the youth mar­ket re­ally about con­di­tion­ing kids to ac­cu­mu­late debt?

Toronto Star - - Living - AN­DREA GOR­DON FAM­ILY IS­SUES RE­PORTER

Meet Danny, a typ­i­cal teen. Ex­cept when he first flashes across the TV screen, he’s kneel­ing in a playpen. A cap­tion in­tro­duces him as “Re­cov­er­ing Momma’s Boy.” Sec­onds later, Danny is in a high­chair, protest­ing, “I’m not a baby, mom!”

Switch to voiceover and Danny sums up his prob­lem: “I re­ally wasn’t in con­trol of my life.” En­ter the MuchMu­sic Pre­paid MasterCard. The baby equip­ment dis­ap­pears. Danny, now a big boy, tells us his new card means free­dom. Money mat­ters are “as easy as load­ing it and spend­ing it.”

MuchMu­sic, which joined forces with MasterCard this spring to launch the new pay­ment card aimed at teenagers as young as 13, sure knows its tar­get mar­ket. The last thing ado­les­cents want is to be treated like chil­dren. They are strug­gling to ex­ert their in­de­pen­dence. And they’re also big­ger spenders than ever be­fore, on­line and in malls. Both com­pa­nies are hop­ing to cash in on that com­bi­na­tion. The new MuchMu­sic card is best de­scribed as a pay­ment card that can be loaded and reloaded with funds and then used like a credit card. Kids ages 13 to 15 can get one us­ing their par­ents as ac­count hold­ers. Those 16 and up can ap­ply on their own. It’s among the latest prod­ucts on the mar­ket that make it eas­ier than ever for teenagers to spend money.

It’s also one of at least half a dozen ar­range­ments MasterCard has fa­cil­i­tated to of­fer pre­paid cards in Canada. (While Visa Canada doesn’t specif­i­cally mar­ket to teens, it does of­fer a Visa Gift Card that can­not be reloaded.)

Not long ago, fi­nan­cial in­sti­tu­tions didn’t much care about the un­der-18 set. But younger teens, now ac­knowl­edged as the driv­ing force be­hind fam­ily spend­ing de­ci­sions on items rang­ing from cars to fast food, have be­come a soughtafter group in a card-sat­u­rated mar­ket­place.

As well as be­ing big con­sumers, to­day’s kids have been raised in an era when debt at a young age is con­sid­ered in­evitable rather than some­thing to be avoided, es­pe­cially for post-sec­ondary stu­dents. So it’s not a sur­prise that lenders want to build brand loy­alty early with th­ese fu­ture bor­row­ers.

Pre­paid cards aren’t the same as credit cards be­cause funds avail­able are bought in ad­vance and there is no risk of ac­cu­mu­lat­ing debt. But some ex­perts say they still should be used with cau­tion. Mix­ing teenage im­pul­siv­ity with easy ac­cess to cash can pave the way to dicey sit­u­a­tions.

“It de­vel­ops the shop­ping habit of ‘you put down a piece of plas­tic and you can buy any­thing,’ ” says Frank Wig­in­ton, a cer­ti­fied fi­nan­cial plan­ner, in Toronto.

How­ever, he says there are pos­i­tives about the pre­paid cards, if they are used care­fully. They can be a use­ful tool for par­ents to dis­trib­ute al­lowance, track kids’ pur­chases and teach them about bud­get­ing. They can be a low-risk way for teens to take on some fi­nan­cial in­de­pen­dence; they are good to have on hand for emer­gen­cies. “But it has to start with a con­ver­sa­tion and there have to be on­go­ing con­ver­sa­tions.”

Oth­er­wise, Wig­in­ton warns, teens raised on in­stant grat­i­fi­ca­tion and in­ad­e­quate fi­nan­cial plan­ning in­struc­tion are at risk of get­ting into trou­ble once they start liv­ing on their own and make the tran­si­tion to credit cards.

To Max Vali­quette, pres­i­dent of the Toronto-based youth mar­ket­ing and re­search firm Youthog­ra­phy, “pseudo credit cards” like pre­paid cards and the huge as­sort­ment of gift cards avail­able for ev­ery­thing from iTunes to Amer­i­can Ea­gle are prim­ing kids to be­come fu­ture bor­row­ers. “That jump to a credit card is an easy tran­si­tion,” he says.

There will be no short­age of op­por­tu­nity, ei­ther. By the time they turn 18 or set foot on a post­sec­ondary cam­pus, teens are bom­barded with credit card of­fer­ings.

But MuchMu­sic di­rec­tor of mar­ket­ing Susan Arthur says the com­pany doesn’t con­sider pre­paid cards the gate­way to credit cards. “Cer­tainly, that was not our in­tent,” she says.

She says the com­pany has been ap­proached about spon­sor­ing fi­nan­cial prod­ucts for more than 15 years and the pre­paid card pro­vided an op­por­tu­nity for “brand ex­ten­sion” in a safe way. The card gives thou­sands of kids ac­cess to buy ring­tones, videos and other prod­ucts from the net­work’s web­site.

Elena Jara, ed­u­ca­tion co-or­di­na­tor with Credit Canada, a non-profit credit coun­selling agency in Toronto, has seen her share of teens in fi­nan­cial trou­ble. She says most kids don’t grasp the dif­fer­ence be­tween pre­paid cards, debit cards and credit cards “un­til they get the bill.”

Take the case of Janet, 22, of Toronto. Janet, who doesn’t want her real name dis­closed, says her par­ents were big savers and al­ways warned her about debt, though she didn’t get much day-to-day fi­nan­cial ad­vice. When she moved out at 16, she soon got into trou­ble with an un­paid cell­phone bill that bloomed to $900, so she signed up for a cou­ple of credit cards to tide her over. Soon, her stu­dent Visa was at its $1,000 limit. She dropped out of school to work to pay her bills.

“I was us­ing the credit cards to shop for what­ever I wanted and then only pay­ing the min­i­mum bal­ance,” she re­calls. “I al­ways thought I’d be able to han­dle it (cards) but I was proven wrong.”

Last fall, Janet sought the help of Credit Canada, where she learned how to bud­get and got a pro­gram to help her re­pay her debts. She’s back at school part-time as a ma­ture stu­dent and hold­ing down a job; she ex­pects to be debt-free by next sum­mer. But it will take much longer to re­build her tar­nished credit rat­ing.

Janet’s ad­vice: Teens should avoid us­ing credit cards for shop­ping. If they have to get a card for emer­gen­cies, keep it at home. The same goes for pre­paid cards, she says. She’s wary of the end­less pitches for any kind of money card be­cause “it just makes teens want to spend.”

Jara takes a dif­fer­ent approach. She says teens have to learn to take re­spon­si­bil­ity for their fi­nances and it makes sense to start us­ing cards once they have a part-time job or head off to col­lege. “And let’s face it, at 18, you don’t want to be mon­i­tored (by par­ents).”

She says credit cards with low lim­its aren’t a bad way to start learn­ing about money man­age­ment and es­tab­lish­ing a credit rat­ing — as long as par­ents don’t make a habit of bail­ing their kids out for poor spend­ing de­ci­sions.

If they don’t learn early, says Jara, teens with stu­dent loans of­ten load up credit card bal­ances and think they’ll pay ev­ery­thing back af­ter grad­u­a­tion. Then they find them­selves in a low-wage first job, try­ing to cover the rent but re­quired to re­pay loans.

“It can be a vi­cious cy­cle.”

That’s a sober­ing coun­ter­point to Danny’s TV mes­sage on the MuchMu­sic pre­paid MasterCard ad, in which he urges fel­low teens: “It’s time to free your­self.”

SHUT­TER­STOCK PHOTO IL­LUS­TRA­TION

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