Starting teens on plastic can be costly

October 31, 2010 at 12:00a.m.

Now that credit cards, by law, come with a long list of restrictions on late fees, penalties and rate increases, how in the world can consumers still get ripped off on plastic?

After all, the Credit Card Accountability, Responsibility and Disclosure Act of 2009 puts a limit on late charges, bans most interest-rate increases on existing balances and provides other protections for consumers, such as a ban on card-issuers raising interest rates in the first year.

On top of that, college students who are younger than 21 are supposed to have a tougher time getting a credit card.

So what’s the problem?

Well, can you believe it, those new credit-card rules contain a few loopholes.

When they try to sell you on plastic, remember that paper is usually cheaper.

But credit-card companies can’t sell cash, so they pitch safety — or the notion that a prepaid piece of plastic can stop young adults from running up credit-card debt or bouncing checks.

With prepaid cards, parents — plus their teens and young-adult children — can sign up for e-mail alerts to know when and where money was spent. More important, a son or daughter cannot spend more than what’s loaded onto the card.

PASS from American Express also notes that its prepaid, reloadable card cannot be used for car rentals, cruise lines or casinos. Every effort is also made to block spending with merchant codes that are not appropriate for teens, such as gambling and adult entertainment.

“Parents said they wanted a better way to give their teens money,” said Vanessa Capobianco, a spokeswoman for American Express in New York. “It’s like driver’s ed.”

Sounds so sensible.

But what’s this protection cost?

Search as you might for the fees — you know there are fees — they weren’t detailed on the mailing we received for the new American Express PASS Card. Instead, we were offered a $25 bonus with the first reload through Nov. 30.

A tempting offer, but I went online to learn that the PASS card has a $3.95 monthly fee — although it’s waived until Oct. 1, 2011.

Prepaid cards fall through the cracks when it comes to new consumer protections because they are not covered by the Credit Card Accountability, Responsibility and Disclosure Act.

Do parents really want to spend nearly $48 a year for this prepaid plastic for a high school or college student?

American Express says its members have responded well to the PASS card, which was first offered in May and includes roadside assistance, purchase protection and some discount programs, such as one for buying music online at PASS music stores. See www.passmusicstore.com; card members get 20 percent off purchases when they use PASS to buy three or more tracks.

Also, if a PASS card is lost or stolen, the money on it can be replaced.

But then there’s a $1.50 fee for using the card at an ATM.

Not good, especially if you understand how ATMs work and realize it’s very likely that you’d pay far more than $1.50 to get cash from the machine.

ATM fees generally are part of the deal with many prepaid reloadable cards marketed to teens and other consumers. The Walmart MoneyCard Student Edition, for example, starts with a $2 ATM fee.

Your teen might pay $1.50 to American Express or $2 to use that Walmart MoneyCard — plus $2 or $3 to the bank or other operator of the ATM, so you’re looking at $3.50 to $4.50 in fees for one cash withdrawal.

Not good.

PASS does allow parents to block ATM usage — which is good — and does not charge other fees, such as for reloading money onto the card, also good.

The card is for those 13 and older.

But would I want my son to end up spending $3.50 here or $4.50 there to learn valuable lessons about money?

At this point in his life, cash does fine. He lives at home; he does not drive; he does not need roadside assistance; he also has his own rewards program at home.

My son — as you might imagine — has heard plenty about fees.

And given his delight in actually getting something when he gets his hands on my money — say basketball trading cards for $2 a pack — I’m pretty sure he’s ready to take a pass on plastic.

But who knows what will happen when he’s driving, or in college. Will the idea of carrying around plastic be too cool to pass up?

Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stomporfreepress.com.

2010, Detroit Free Press