Kids and Credit Cards: Five Trends To Watch
Financial reform made it more difficult for teens to get a credit card without help from their parents. But that doesn't mean you can let down your guard. The card industry has big plans to win back lost revenue -- if not from your teens, then from you.
Here are five trends to watch over the next 12 months:
· Higher borrowing rates on new accounts New laws have made it difficult for card companies to raise the annual percentage rate (APR) on a card once it is delivered. So card issuers have been pushing new accounts, a strategy that has boosted the average credit-card APR to 13.8% from 11.6% in May 2009, according to LowCards.com. Most vulnerable are young people signing up for their first card. They should compare all costs but pay special attention to the APR.
· More offers in the mail With the economy stabilizing, card companies have begun to solicit for new business en masse. Card offers are on pace to nearly double in 2010. At Chase, offers rose by a factor of four; at Citibank, by a factor of three. Teens are somewhat protected. But card companies are marketing to them anyway and in many cases getting their hooks in early with a fee-laden reloadable pre-paid card.
· Looser lending standards You can't have two or three times more card offers without soliciting more suspect consumers. That's good news if you've been denied credit recently; the banks may want you back. For example, Capital One mailed 22 million card offers to folks with less-than-stellar credit in the third quarter of 2010, reports Synovate. That was a stunning 50-fold increase over a year ago.
· More Pre-paid cards Young people denied access to traditional credit cards have found the next best thing in the gift and pre-paid card market. The problem: Pre-paid cards like the ill-fated Kardashian Kard often come with high fees. "Before now, banks ignored pre-paid cards because they made much more revenue from debit and credit cards," says Bill Hardekopf, CEO of LowCards.com. "Regulations have reduced much of that revenue, so banks are looking at other options, including pre-paid cards."
· Steeper fees but bigger rewards Look out for new rewards cards that entice you with a generous cash-back feature but levy a hefty annual fee. Citi's new ThankYou Prestige Card has a whopping $500 annual fee; you earn up to 1.3 points for every $1 spent plus an annual bonus up to 5% of spending. Discover More and Chase Freedom cards offer $100 bonuses for new cardholders who reach certain spending thresholds within three months. Cards like these encourage spending and make no sense for most young adults. They may work for parents -- if you spend enough. But do you really want to spend like it's 2007?
Photo courtesy Flickr user andresrueda
More on MoneyWatch:
- Dangerous debit cards
- The right plastic for your teens
- Race to Nowhere: Must-see film for parents
- Top 5 money lessons for kids
- What the Kardashian Kard showed us
- Financial education at school - a pipedream?
Daniel J. Kadlec is an author and journalist whose work appears regularly in Time and Money magazines. He is the former editor of Time’s Generations section, which was written and edited for boomers. Kadlec came to Time from USA Today, where he was the creator and author of the daily column Street Talk, which anchored the newspaper's business coverage. He has co-written three books, including, most recently, With Purpose: Going from Success to Significance in Work and Life. He has won a New York Press Club award and a National Headliner Award for columns on the economy and investing.
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