HOW THE CREDIT CARD ACT OF 2009 AFFECTS YOUR KIDS AND CHARGING
In February, the Credit Card Act of 2009 went into effect to limit a credit card’s ability to charge high interest rates and service fees. Kids and especially kids in college were trapped with high balances and high interest rates. Kids and credit cards have always been a risk to credit card companies, and to their parents, of course.
KIDS UNDER 21 NOW NEED CO-SIGNERS
To limit risk to credit card companies kids will now need a co-signer, thankfully. Colleges are not allowed to provide credit card stands with nice-looking gifts given to students who fill out credit card applications. Many children will be tied to their parents, financially, until after college or grad school, so teaching financial responsibility now will save problems later on in life, when debt typically goes up. Credit card companies have historically sought to entice kids with credit cards from a young age, when they can start a pattern of charging.
KIDS NEED CREDIT CARD SPENDING RULES
Some parents are imposing strict rules about when a child can use the credit card. A good rule of thumb for charging on the credit card is that anything over $50 must be approved by the parents. Kids need to walk through the credit scoring process, and understand how having a credit card will both help and hurt their credit scores, even years down the line. John Whitcomb, a Medical Doctor, and author of “Capitate Your Kids” recommends not only imposing spending limits, but also spending limits in different categories, like clothing and living expenses; and not using the card as a loan to repay later. Half of all college students have real credit card debt; the average is more than $3,000.
CREDIT CARDS THAT OFFER GOOD BENEFITS FOR STUDENTS
Though I am not saying I recommend giving kids credit cards, when used properly there are some good options. Citi mtvU Platinum Select Visa Card for College Students gives points back when you pay on time and don’t go over your credit card limit. Good grades will earn you 2,000 points twice a year. Points are redeemable for gift cards, travel and electronics. There is no annual fee. These benefits are not only enticing to a college student; they are also a good offer these days.
PREPAID CREDIT CARDS
Similar to gift cards, you pay for a prepaid credit card up front. The child can spend only up to the limit of the card. Cards can be issued in the child’s name and money can be deposited into the account. These cards are used like a Visa or Mastercard. Prepaid cards are safer than cash because if the card is lost the account can be frozen. There are no high interest rates or late fees with prepaid credit cards. The one downside of getting a prepaid credit card is the activation fee you might be charged at the onset. Also, if you use the card at the ATM you will be charged a fee, which will lower your available balance. Good prepaid credit cards right now are the UPside Visa Prepaid Card and Current by Discover, which allows parents to restrict certain kinds of spending on the cards.
Prepaid cards are personally my favorite “credit card” option for kids, and I feel they are ultimately safer for kids, especially kids with large spending habits. The up to $50 a year can be a high price to pay in maintenance fees, but the fees are well worth the price tag if it reigns in spending.
VIRTUAL SPENDING AND KWEDIT
I read an interesting article recently in the New York Times about our young kids and virtual spending. Virtual spending is a $1 billion industry. The beauty with many virtual businesses is that these companies are really not selling anything of value. Kids get hooked on Internet games, as with Kwedit, and can pay their bills for their virtual purchases at any 7-Eleven, using cash; 7-Eleven then notifies Kwedit that the child paid for their purchase. Kids don’t need any parental control in order to spend in this way. Scary.
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