U.S. PIRG Consumer Blog: Addicting Kids To Credit Cards

Washington Post financial expert Michelle Singletary had it right in her syndicated column yesterday, when she said: Credit Cards for Kids? Not in My House. What does the extremely profitable and virtually unregulated credit card industry do when it has the problem that every adult American with a credit rating north of zero already has a wallet bursting with credit cards? Obviously, it adopts the tobacco industry's strategy: it sells to kids. More.

Of course, since the kids have no credit record, the industry's main strategy is to market "pre-loaded" debit (and even some credit) cards branded with credit card logos and usable almost anywhere a credit card can be used. Michelle Singletary summarizes one problem here:

But make no mistake about it, a prepaid credit card in the hands of a child sends the wrong message. It disconnects the child from the reality and limitations of using cash. Studies show that when you use plastic to pay for things, you tend to spend more money. This is the case even for people who faithfully pay off their bills every month.

She then identifes the second problem: Fees.

I'm not a fan of many prepaid cards because of the numerous fees, which vary according to the issuer. There is a set-up fee (I saw one as high as $159.95). Then you have to pay to load money onto the card. You may have to pay a monthly maintenance fee (typically $4.95 to $6.95) and/or an annual fee (up to $99.95). You may also be charged an inactivity fee if you don't use the card.

Here's a link to one bank's terms, scroll down for all the fees.

The credit card industry will argue it is teaching financial literacy-- it isn't and it shouldn't. Their message (spend) is like the tobacco industry's "forbidden fruit" no-smoking messages to kids. What the credit card industry is doing is getting kids addicted to plastic, because plastic doesn't seem like spending. And, by the way, in addition to the fees consumers pay to use these pre-loaded cards, nmerchants pay more in the form of the interchange fees they pay banks, and recover by raising everyone's prices. We have more in our recent testimony on interchange here. We also have a consumer help website on credit card tricks truthaboutcredit.org. Note that the banks will claim that their pre-paid debit and credit cards are better than "gift" cards, which can only be used in one store or one mall. Recently the Montgomery County Office of Consumer Affairs studied gift card fees and found that the fees on bank cards were worse, much worse, than store cards. I am shocked, shocked.