Should kids and credit cards mix?

By Marianne Curphey

It's never too early to teach your children about how to handle money, or what credit and debt are. For the last year, Norway's SpareBank has offered three cards to children and teens, including one marketed to those younger than 13. But can children and young teens handle plastic?

Philip Pearson, independent financial adviser with P&P invest, doesn't think so. He says teens are likely to overspend, especially when they head to university.

kids-and-plastic

"The concept of credit should be carefully introduced from age 16 in the form of a debit card. You don't need a credit card until you are working," Pearson says. "There is always too much credit available [on a teen's first credit card], and overspending is endemic in teens and young adults."

National Debtline's Paul Crayston agrees.

"On their own, credit cards would not necessarily be useful for younger people to have; if backed with a clear and effective programme of financial education, then some benefits are foreseeable," Crayston says. "However, there are risks, too, not least that young people will build up debts that are difficult to repay."

However, Yvonne Goodwin, of Yvonne Goodwin Financial Management, says racking up a little bit of debt can be a valuable lesson for older teens, as it teaches them how to handle credit before they leave the nest.

"They may go off the rails for a while and get into debt," says Goodwin. "If this happens, you need to give them a strategy to pay off their debt, rather than paying it off for them."

Debit and prepaid cards may be a better route
While the youth credit card market is small in the UK, there is no shortage of prepaid cards available for youths 13 or older, and bank accounts linked to debit cards for those 16 and older.

Pearson says debit cards should be introduced gradually in conjunction with a bank account so young people could learn how to manage money. And Crayston says there are some clear benefits to providing youths with prepaid cards.

"Prepaid cards can help people gain a basic understanding that card spending has an impact on your finances, and additionally provides some protection for the money held on the card," Crayston says.

Prepaid cards for youths
There are several pre-paid cards on the market aimed at young people.

"Prepaid cards are quite expensive to load and use, so you need to look carefully at the charges involved," says David Black of Consumer Intelligence, which analyses products and providers. These charges may include card application fees, monthly service charges and top-up fees.

The prepaid market includes:

MeCard Prepaid MasterCard: This program comes with a Parent MeCard and a Teen MeCard, each protected with a PIN. Funds are loaded onto the Parent MeCard, and parents transfer as much as they wish to the Teen MeCard. Parent cards are free, but teen cards cost £9.99 each. Loading by debit card online costs £0.50 per load; loading at PayPoint costs 3% of load value.

goHenry: This online money management program is marketed to children 8 to 18 and comes with an account for the parent and a linked account for each child, all manageable through mobile and web apps. Each child gets a prepaid Visa card. As a parent, you can make weekly or one-off payments to your child's account. You can also set tasks that must be completed before the payment can go through, and set spending limits. The program costs £1.97 per month. Loading from a debit card costs 50p per load.

Splash: You can load this payment card with cash, or transfer funds to it from a bank account, wage transfers or with a credit or debit card. The application fee is £5, and the annual account maintenance fee is £4.95. Topping up costs 30p per £10 at Post Office or PayPoint, or 2.5% of the amount when you use a credit or debit card. The merchant transaction fee is 2.5%.

Debit  and cash cards for youths
Black says accounts linked to debit cards vary, but the minimum age limit tends to be 16 and older (credit cards are available to teens 18 and older).

Santander has two youth account options that offer a debit and cash card for children 11 to 18: the 1-2-3 Mini current account or the 1-2-3 Mini account in trust.

Bank of Scotland has an under 19s account for children ages 11 to 18, which includes a choice of debit card or Cashpoint card, as do Lloyds Bank and TSB.

The Co-operative Bank has a bonus account for children 7 to 17, which has a cash card but no debit card. Nationwide's FlexAccount is available to teens beginning at 16, and their FlexDirect and FlexPlus accounts are available to anyone 18 or older.

See related: Blogger Q&A: How I'm teaching my kids about money, How young is too young for a prepaid card?

 

Published: 1 April 2014