Thursday, July 20, 2017

Build Your Teen's Credit Score With A Secured Card

Teen holding secured credit card.

Your kids will probably be caught off guard the first time someone inquires about their credit history. For my kids, it was that first apartment rental in college. So building a solid credit score early can be a smart move. It’s also an important part of your child’s financial education.

Prepaid debit cards are excellent financial training wheels for kids and teens. They’re safe and accessible. But they don’t build a credit history.

Credit cards build a credit history. But safe and accessible for teens? Not so much.

Teens can do a lot of serious financial damage with a credit card in a very short period of time. Like when a kid racked up $7,625.88 on his parent’s credit card playing Xbox games.

Legally, a teen can’t get a credit card as an independent cardholder until age 18. But even then, most teens won’t qualify. They have to be able to demonstrate a sufficient steady source of income outside of Mom or Dad. Most can’t meet that bar.

You could add your teen as an authorized user on your own credit card, or you could co-sign for your teen on a separate card. But both routes put your own credit history (and budget) at risk.

Consider a secured credit card instead.

A secured card requires an up-front deposit. That security deposit dictates the credit limit on the card. Often they’re the same amount. If your kid falls behind, the card issuer can dip into the deposit to cover delinquent payments or late fees. When the card is closed or upgraded to a regular credit card, the security deposit (less any delinquent obligations) will be returned. The rules on this will vary and are spelled out in the cardholder agreement, like this one from Discover.

But before applying for the secured card, consider imposing two prerequisites for your teen:

  1. A sustained responsible track record with a debit card. If your teen can’t pass the No-Decline Challenge, he isn’t ready.
  2. The security deposit in hand. Make your teen come up with the security deposit, not you. If your teen can’t save the few hundred dollars required, she isn’t ready.

With the prerequisites met, you can check out sites like Magnify Money to compare secured credit card offerings. At the moment, the top pick is the Discover it Secured Credit Card.

I culled through the user reviews of the Discover card and found a few things to look out for:

  • Applying might be a hassle. “Applying for the card is like enlisting in the military, all the documentation required is ridiculous.”
  • Slow payment posting can cause unexpected declines. “The fact that it takes 10 days to adjust your available balance after the payment is taken out of my checking account, is a killer for me.” That means your teen could be bumping up against the card limit and getting purchases declined well after a balance payment is made.
  • Stinginess with limit increases. “I figured my limit would be increased as I use it and time passes but nothing has changed.”
  • Lengthy graduation period. “I have to wait a whole year to be converted to an unsecured card.”

To circumvent any issues with card limits and ensure your teen can pay the card off in full every month with low utilization, I recommend a hybrid strategy:

  1. Use the secured card in conjunction with a prepaid card.
  2. Put a few predictable or fixed recurring billings on the secured credit card that fall well below its limit and can be comfortably paid off each month.
  3. Leave the remaining discretionary spending on the prepaid card to stay on budget and avoid any risk of debt.

On budget. No debt. A solid credit score. Your teen is set.

And your teen’s eventual landlord won’t be coming after you as the cosigner for the rent either. Bonus.


Want to turn these tips into action? Check out FamZoo.com.

Thursday, July 13, 2017

Base Your Kid’s Movie Theater Budget On Real Data

Kid at movie theater.

Will a twenty cover your kid’s typical movie theater outing?

It should comfortably do the job in most cases.

How do I know? Whenever a kid carrying a FamZoo card makes a purchase at a movie theater, the transaction is tagged with a Merchant Category Code (or MCC) of 7832. Assuming kids don’t hit the theater more than once a day, I can tally up all the transactions with an MCC of 7832 in a single day for a given (anonymous) kid to see what the total spend for each visit was. Then I can look across all such visits in a time period to get some interesting aggregate data.

Here’s what I found for June, the peak theater month for FamZoo card carrying kids:

The average spent per theater visit was $19.22.

The percentage of visits requiring a five, ten, twenty dollar bill or more were:

$5 or less 8.3%
$10 or less (but over $5) 19.2%
$20 or less (but over $10) 37.8%
Over $20 34.6%

Some other fun facts:

  • 15 years old was the average age for kids making a movie theater purchase.
  • 91 cents was the minimum purchase made in a visit. Weird, what in the heck can you buy for 91 cents at a movie theater?!
  • $81.16 was the maximum spent. Let’s hope some friends were included in that one!
  • 62.8% made just one purchase in the theater, presumably because the ticket was on mom/dad, or they stayed away from the snack bar.
  • The maximum number of purchases in a visit was 7. Wow. Hungry?!

So, if your kid is figuring movie costs into a discretionary spending budget, $20 sounds like a reasonable round number to use per visit. Or, if you’re funding a one-off excursion, you might state up front that anything over $20 is your kid’s responsibility. (It’s the old premium price rule technique.)

Either way, a twenty should cover your kid’s next theater visit.


Want to turn these tips into action? Check out FamZoo.com.

Wednesday, July 5, 2017

Review 529 Statements With Your Teen Every Quarter

High school grad headed to college.

How much does your teen know about the 529 account you opened for college savings?

Nothing?

Or, maybe you’ve mentioned it once or twice, but you aren’t sure it really registered.

That’s the norm. Pretty dry stuff for a teenager.

I have a radical suggestion.

Review your 529 statements with your teen. And do it every quarter.

Yes, your initial sessions will be received with eyeball rolls, yawns, or worse. But keep up the good fight.

Through your consistent and repetitive efforts, your teen will gradually learn the following:

  1. How much college costs. Circle the ending balance on the latest statement. Your teen’s eyes may light up the first time. Mine’s did. Now, ask your teen to name a favorite university. Google the annual tuition. Divide your current balance by the tuition figure. That’s how many years you can afford right now. Buzz kill.
  2. Where it makes sense to apply. Armed with the sobering perspective from step 1, your teen will naturally start thinking more carefully about where it makes sense to apply. Maybe starting in community college would be appropriate. Maybe it’s time to look into scholarships. Did your teen know there are scholarships for just about every interest? Even drawing ducks. Who knew?
  3. How saving and investing works. This one will take some time to soak in, so be patient and start simple.

    Note how much money you’ve contributed to the account this period. Talk about how you’ve worked college savings into the family budget. If your contributions are automated, point out how that makes it easy to stay on track. If relevant, talk about how relatives have graciously contributed too.

    Now zero in on the Investment Summary section. Talk about how the 529 funds don’t just sit there. You’ve put the money to work through investing.

    Talk about how, early on when college was still far off, you had a pretty decent percentage in a low cost stock market index fund. That gave you a good shot at growing the money over time, even if the market went up and down a bit along the way. Circle the Total Portfolio Earnings entry to highlight that growth to date. Explain that now, with college getting closer, you’re shifting funds out of the market to reduce risk.

    Here’s where, over several 529 review sessions, you can communicate incredibly valuable lessons about basic investing principles in a relevant, tangible, repetitive way.

  4. What a tax-advantaged account is. When you circle the portfolio earnings, scribble the words “tax fee” nearby each time. That’s one of the special things about a 529. The investments grow tax free. This will remind your kid to always be on the lookout for tax-advantaged investment opportunities — like that Roth IRA account you helped your teen open with that first summer job. Right?!
  5. What a qualified withdrawal is. Circle the Withdrawals line item. Explain that it may be zero now, but eventually you’ll be seeing how much is being pulled out each quarter to pay for school. Keep reiterating that the withdrawals are for qualified expenses only! Tuition? Yep. Books? Yep. Spring Break? Nope. Withdraw funds for the wrong thing, and you’ll be looking at some nasty penalties. Good to know.
  6. Gratitude. If you stick with your 529 reviews, this could be the biggest bonus of all. You might start hearing some crazy talk from your teen, like: “I need to take this college thing more seriously.” And, perhaps: “I really appreciate what you’re doing here.” Or, possibly even: “Maybe I should start putting part of my summer paycheck in the 529.” Stranger things have happened!

So, that’s 6 valuable lessons your teen can learn from reviewing 529 statements for 15 minutes every 3 months. Tough to beat those quarterly returns. Ready to make the investment?


Want to turn these tips into action? Check out FamZoo.com.

Wednesday, June 28, 2017

Find The Best Age To Give Your Kid A Prepaid Card

Age Distribution Chart for FamZoo Kids Using Prepaid Cards

A prepaid card can be a great option for kids just learning the money management ropes.

It’s safer than cash.

It’s smarter than handing over your own credit card.

It’s often cheaper than bank debit cards which have insanely sneaky overdraft fees.

And the more innovative cards include some great educational features — like parent-paid compound interest.

The bottom line: prepaid cards are excellent training wheels for adult-centric banking products like bank debit cards and credit cards.

But what’s the right age range for kids to be using prepaid cards? Data from our family finance site yields some insight.

Check out the chart above. It shows the current age distribution of children using FamZoo cards.

The sweet-spot is near the boundary between middle school and high school. Makes sense.

Some kids start using prepaid cards as early as preschool, but that’s unusual. Usage ramps steadily upward through elementary school and the pre-teen years.

Since most card offerings require the legal cardholder to be at least a teenager, you may be wondering how so many kids in the chart can be under 13. In the pre-teen case, kids use what we call “on behalf of” cards. The parent is the legal cardholder, but the card is dedicated to the child’s financial activity. Here’s how it works.

After the early teen years, usage ramps back down again through the end of high school and into college.

That said, even as older kids transition to traditional bank accounts, many retain their prepaid cards to keep a collar on discretionary spending and coordinate with parents throughout college.

In fact, usage can extend beyond college too. As Monte, a FamZoo reviewer on Facebook, points out: “Not just for children! FamZoo [prepaid cards] have helped my fiance and I use the envelope method for budgeting on hobbies. With a weekly allowance we can save, donate, and spend guilt free money all within a shared budget.”

Whether used as training wheels for youngsters or a budgeting tool for oldsters, prepaid cards are becoming an increasingly familiar fixture in the standard money management toolbox.

Maybe it’s time to get one for your kid.


Want to turn these tips into action? Check out FamZoo.com.

Wednesday, June 14, 2017

Teach Your Young Gamer To Budget

Gaming Loot Microtransaction

Kids pay money to play online games.

But you already knew that. You recognize the names in their transaction alerts: EA, Minecraft, Roblox, Steam, Blizzard, Riot Games, XBox, G2A.

Kids also pay money to buy tchotchkies for their gaming avatars — skins, potions, weapons.

You may already know that too. If not, check out sites like realmstock.com — a marketplace for trading in-game items.

But did you know kids are even paying money to watch other kids play online games?

Yep, that’s a thing. Check out Twitch. Find a live streamer. Look for the subscribe button (probably upper right), and check out the options. Kids pay to get badges, emoticons, ad-free viewing, and other “benefits”.

In fact, one 14 year old FamZoo cardholder paid a total of $134.97 in the last 30 days watching other gamers game. Yikes.

Why do I know this? A Monday article piqued my interest in what kids are spending on gaming these days. The Wall Street Journal reported that gaming providers like EA are charging less for the games themselves while reaping huge profits from the little microtransactions inside the games.

And just how much are gamers spending on in-game microtransactions? A mind-blowing $71 Billion worldwide in 2016. That rivals the entire GDP of Cuba!

The article prompted me to dig into the FamZoo data around gaming related transactions by our child cardholders. That’s what alerted me to the Twitch trend mentioned above.

Some other discoveries:

  • The average spending in the last 30 days by teen gamers using FamZoo cards is $27.41.
  • The most spent in that same period was $262.09 by a 16 year old.
  • Some kids pay money to play chess online. Yes, that was my favorite discovery.

Obviously, gaming companies smell a profit opportunity with our kids.

Me? I smell a financial literacy opportunity.

Try this with your young gamer:

  1. Review the gaming related transactions over the last month.
  2. Agree on a monthly gaming budget. Use the data from step 1 as a point of reference, but not necessarily a benchmark — note the average monthly teen spending mentioned above.
  3. Track spending versus the budget each month. As they say, “What gets measured gets managed.”

You might even consider a separate prepaid card dedicated to online gaming. Load it each month with the agreed-upon budget. Any attempts to overspend will be harmlessly declined.

So, whether your kid is paying for games, paying for do-dads inside games, paying other gamers to game, or all of the above, you need to get your head in the game as a parent. Know what your kid is doing. Then, use your kid’s gaming habit as an opportunity to pass along some critical personal finance basics.


Want to turn these tips into action? Check out FamZoo.com.

Wednesday, June 7, 2017

Stop Tolerating Fs On Your Kid’s Card Report

Dad and kid with prepaid card report

Kids aren’t making the grade when it comes to successfully transacting with prepaid cards.

Just take a look at these stats from FamZoo cardholders.

I sampled kids from active families who have:

  • used a card for at least 3 months, and
  • have made 20 or more purchase attempts in the last 90 days.

A decline percentage of 3% means that for every 100 purchase attempts, the cardholder would likely experience 3 declines. If those 3 declines were incurring average bank overdraft fees, the cardholder would be facing over $75 in penalties. Ouch.

Here’s how the kids break down by purchase decline percentages, which I bucketed into subjective grade levels:

Decline Percentage Percentage of kids Grade
0% 19.0% A+. Bravo!
5% or less (but over 0%) 12.1% B. Getting there.
25% or less (but over 5%) 32.8% C. Lots of work to do.
50% or less (but over 25%) 16.1% D. Pretty darn awful.
Over 50% 19.7% F. Yikes!

That’s a lot of kids bringing home bad money habit report cards.

I’ve written before about the 6 month Zero Decline Challenge as a test for bank account (or credit card) readiness. The good news is 19% of the kids from this sample are at least half way there. But the majority are nowhere close, with 19.7% flat out flunking.

I’ve also suggested assessing a parental overdraft fee as a way to curb declined transactions. It looks like the Bank of Mom/Dad would be clawing back a ton of fees from these kids!

But maybe you’d rather offer the carrot instead of applying the stick. A reward to encourage the good behavior instead of a penalty to curb the bad.

If so, consider paying out a bonus for making the grade each month. Of course, it’s your call as to which grades warrant a bonus and how much, if any.

To help kids make the grade, offer this simple study guide for avoiding declines:

  • Check the balance before a purchase. Most cards have handy apps that make checking the balance easy for kids.
  • Watch out for recurring bills. That’s where lots of the kids are going astray with declines. They sign up for services like Spotify and forget to leave a buffer on their cards for when the next billing hits.
  • Remember the PIN. Not only will the wrong PIN yield a decline, but 3 PIN strikes and you’re out. Help your child pick a memorable but secure PIN.
  • Locate the card security code. Typically, it’s on the back next to the signature panel. The code is a security measure intended to reduce fraud when the cardholder is not present for the purchase — like when purchasing online.
  • Match the billing address. Make sure your kid knows the address on file for the card. That’s the address your kid will need to supply for the billing address when purchasing online. If the two don’t match, the transaction will be declined.

After mastering those points, your child will be on the road to an easy A+.

Whether you opt for the carrot, the stick, or just a discussion when it comes to declines, make sure to pay attention. Ignoring bad habits won’t improve them. Turn on card activity alerts to detect declines right away, and coach your kids in real time.

Raising your kid’s money habit grades early will pay big dividends in the future.


Want to turn these tips into action? Check out FamZoo.com.

Thursday, June 1, 2017

Get Your Kid A Just-In-Time Card For Smarter, Safer Spending

Phone with money request for prepaid card.

More and more parents are ordering “Just-In-Time” spending cards for their kids.

What are those? Prepaid cards used only at the moment of purchase.

Here’s how it works.

Normally, the balance on the Just-In-Time card sits at zero. Earnings from a kid’s chores, odd jobs, allowance, or part-time work accumulate in a separate short-term savings bucket. That savings card or account is never used for purchases directly.

When the child wants to make a purchase, she:

  • Checks the balance of her savings to ensure sufficient funds.
  • Requests an immediate transfer from her savings to her Just-In-Time card for the required amount.
  • Waits for her parent to approve and complete the transfer.
  • Makes the purchase using the freshly loaded Just-In-Time card.

Once notified of the purchase, the parent can return any remaining funds to savings and bring the Just-In-Time card balance back down to zero.

Sound like too many steps?

With the latest app-driven card offerings, the cycle can be competed in real time with just a few taps on a smartphone. More often than not, requests from my kids are sent, received, and approved (or not!) while waiting in line at the register.

Why bother with the Just-In-Time card two-step at all? Four solid reasons:

  1. Reduce impulse buys. Now your child will have to stop, consider, and justify each purchase. He can’t just swipe a loaded card willy-nilly on a whim.
  2. Increase dialog. No more silent purchases. A little discussion (often minimal) will accompany every purchase. More money discussions means more money skills. It also means more comfort with financial transparency — your child’s future spouse or partner will appreciate that. And, as Ron Lieber says: “Every conversation about money is also about values.” Bonus.
  3. Increase earnings on savings. Your kid’s money will spend most of it’s time in savings. If you’re offering a healthy parent-paid interest on his account, the funds can grow nicely. Further incentive not to spend.
  4. Thwart fraudsters. Chipotle, Target, the local restaurant, the gas station down the street, that weird gaming site: they’re all places your kid might use his card. What else do they have in common? They’ve coughed up payment card data to fraudsters.

    The chances keep increasing that any card your kid uses will be compromised and have its data sold off on the dark web. Down the line, someone somewhere will probably use that stolen data to hit your kid’s card with a fraudulent transaction.

    Fortunately, his Just-In-Time card has zero dollars on it. That fraudulent transaction will be declined. You’ll see the alert. You’ll order a replacement card without hassling over lost funds. Easy-peasy.

    Meanwhile, your kid’s savings card hasn’t been used anywhere, so its funds are safe.

With a Just-In-Time card, moving money at the very last moment will help your kid hold onto money over the long haul.


Want to turn these tips into action? Check out FamZoo.com.