Parents, who do you think your 15-year-old will listen to: her grandmother, who cautions her to put her Christmas money in a savings account, or that seductive vampire Edward Cullen, exhorting her to spend, spend, spend?
The institutions that issue prepaid credit cards have bet on the latter, which explains the Twilight Prepaid Mastercard, released in the United States this summer. The cards feature the mugs of Robert Pattinson, Kristen Stewart and Taylor Lautner, the stars of the Twilight films. Not quite debit cards and not quite credit cards, prepaid credit cards were originally designed for consumers who couldn't qualify for credit cards or didn't have bank accounts. You upload money to the card and then use it for purchases like you would with a credit card - except there's no line of credit attached to it. Now, many are being marketed to teens: a demographic flush with disposable income but too young to qualify for a real credit card. In the U.S., there are cards emblazoned with such teen pop-culture icons as Emily the Strange, Paul Frank cartoons and SO SO Happy characters. At one point there was even a Hello Kitty card. In Canada, there is the MuchMusic Prepaid Mastercard, which is available to kids as young as 13.
But do these "credit cards with training wheels" really teach kids how to manage money?
Last week, the Kardashian Kard - a prepaid Mastercard tapping into the brand power of the Kardashian sisters, those reality stars famous for being famous - was pulled from the market. The Attorney-General of Connecticut had requested permission to investigate the bank that issued the card because of complaints of high fees for everything from buying the card plan ($59.99 U.S. for six months) to cancelling ($6) to checking the balance at an ATM ($1). In 2005, when prepaid cards first started to take off in the U.S., the market counted less than a million users, according to an Aite Group report published in the Wall Street Journal. Now, there are almost four million users, who have loaded more than $30-billion (U.S.) onto their cards.
Currently, the only product in Canada that's targeted to youth is the MuchMusic Prepaid Mastercard (there are many other prepaid cards marketed to all consumers). Those between 13 and 15 can get one if a parent or guardian signs up and takes financial responsibility for it (the membership cost for the first two years is $39.95 - $9.95 for subsequent years - and users must pay $1.50 every time cash is loaded onto the card). Anyone 16 and over can register for one on his own.
David Eason, chief executive officer of Toronto-based Berkeley Payment Solutions - a company that provides branded Visa prepaid cards to corporations, predicts the youth prepaid card market in Canada will expand in the next few years. "There really is a demand for it in Canada and a niche for it," he says. "Cash, he says, just isn't king for teens who want to purchase goods online - an iPhone app, a DVD, a vintage purse on eBay."
"I don't think any parent is ready and willing to relinquish their own credit cards to their children," says Elena Jara, the education co-ordinator at Credit Canada's Toronto office. "Teens are hungry for these products because a first credit card (even prepaid ones, which don't help build your credit history) is like a passage of adulthood," she says. Under the heading "For Parents" on the MuchMusic product's website, the company says, "It gives your kids the freedom to make decisions (and buy what they want) while teaching financial responsibility."
Suzanne Martindale, associate policy analyst with the San Francisco-based Consumers Union, which publishes Consumer Reports, takes issue with that claim. It doesn't teach kids to be responsible with their money, she says. Instead, you're telling them, "Here's plastic. Go spend, spend, spend."
And the terms are rarely favourable to the consumer. The Vanilla Prepaid Mastercard, which is available in Canada and has no minimum age limit, can be purchased with a preloaded amount at stores such as 7-Eleven. A $2.50 service fee is charged each month for the card, and if you have a balance left on your card when it expires, you will not only lose that money, but be charged a cancellation fee equivalent to your balance.
Some cards also charge users every time they are reloaded with cash. Because there can be disincentives to making deposits and holding onto cash, Ms. Martindale says prepaid cards don't teach teenagers to be responsible with their money. Also, they're the least-regulated plastic products on the market, she points out.
In the past few years, many provinces have passed legislation banning fees and expiration dates on gift cards, but prepaid cards are exempt from these rules. The better alternative, if you want your child to start managing his or her own money? A youth bank account with no monthly fees, where account holders can deposit and withdraw money easily and watch their savings grow. Ms. Jara says prepaid cards are useful for older teens who are making online purchases (which just can't be done with a bank card), but advises parents against loading cash onto the card and paying fees themselves. "The children aren't learning as much as they would if [they were] uploading the credit card, checking balances and understanding that every time they do all this, they're losing money," she says.