Would you hand your teenager the keys to your credit record? I didn't think so. Still, millions of parents are doing just that when they add Junior to the family cell phone plan. It's like handing your teen a credit card with an antenna.
At least with a credit card there's a spending cap. Not so with most cell phone plans. TheWashington Post recently quoted one stunned dad who got a $600 wireless bill thanks to his chatty teenage sons. For a family whose finances are stretched thin, a shocker like that could mean canceling summer vacation, skipping payments on other utilities, or, at the very least, threatening to strike Junior from the will. Woe is the parent who co-signs for a kid's cell phone plan and puts her offspring in charge of paying the bill. When dear daughter forgets to send the check on time, Big Brother at the credit-reporting agencies won't distinguish between you and your little lovely.
Think I'm overreacting? Consider that today more than half of all U.S. residents have a cell phone. And guess who's doing a lot of the talking? That's right -- your precious (who appears to be subjecting only you to her silent treatment). About one-third of kids ages 11 to 17 have a cell phone of their own. Industry watchers predict that by 2007, almost half will. A Telephia Teen Study done last year found that 30% of parents who have a teen on their wireless plan report that they often run out of minutes and end up paying extra.
It's pretty easy to guess where this is going -- just look at the credit card industry. According to Cardweb.com, 80% of those between the ages of 18 to 20 are packing plastic. Many of them are courted quite heavily in college, and by the time they're sophomores, 92% of coeds carry at least one card and more than $2,000 in credit card debt. And that's before they have a credit file -- or a career, for that matter.
The answer isn't to deny kids access to plastic. After all, a credit card helps young people build that all-important credit record and can be invaluable when money is needed in a pinch (for a true emergency, not the munchies). But easy access to credit is also the very reason why so many young people start their lives digging out from under a mountain of debt.
Cell phones are a similarly dangerous temptress -- and one that's wooing a younger audience than lenders would dare approach. Just like a credit card, a cell phone offers convenience, an emergency line (minutes, not cash, in this case), and the opportunity to get in way over your head. And in both instances, many teens and their parents insist that they can't live without one.
One thing's clear: All this talking is giving families a headache.
Talk ain't cheap
Had a few surprises when the cell phone bill arrived? Join the family. (Actually, you might not want to after you're done reading.) A recent survey by NOP World found that one-third of wireless customers admit that most months they were caught off guard by higher-than-expected bills.
The cellular industry's solution for talkative kin is a "family plan." Perhaps you've noticed the slew of clever prime-time commercials touting the benefits of calling plan togetherness. Upon closer inspection, though, many family cell phone plans are far from familial. Common hang-ups include:
Minutes mayhem: It's hard enough for one person to track his or her minutes. Try adding a hormonal teen to your plan. Family plans do not cap minute use -- and most overage charges (up to 45 cents a minute) aren't discovered until the bill arrives. Adding up minutes is one thing. But don't you dare dial before you qualify them. Are they "off-peak," "out-of-plan," or "in-network"? The restrictions are enough to make anyone avoid calling their mother.
Fee frenzy: Want to know why the advertised price rarely matches up with your monthly bill, even when you do stay within your minute allotment? Fees, glorious fees. Only in the fine print will you see that there's an activation charge for that fancy new phone you just bought for a song. (There goes the savings.) And brace yourself for the monthly "taxes/surcharges" line item. Calling someone outside of your home market -- perhaps your child who just moved off to college? Ka-ching! If you dare to cancel before your contract is up, you'll have to pony up.
Complicated pricing schemes: Here's another way that cell phones and credit cards are alike: the mind-boggling array of choices out there. Each one attempts to answer a common consumer complaint. So thank you to those who insisted on rollover minutes and cheaper calls to the people who share your plan. Unfortunately, most people are locked into a cell phone contract before they figure out that it's not the right one for their needs. Which leads me to...
Contract cuffs: Did you know that when you add an extra phone to your already-established family plan that your contract is extended another year (or two)? Neither did I. And while you're at it, remember to budget for that additional activation fee, which averages $35. Sure, you can switch plans within that carrier's offerings, but again, doing so re-ages your account.
All these "gotchas" are hitting the average family right where it counts: the wallet. In the NOP World survey of 1,000 wireless consumers, those families who suffer from cell phone-bill sticker shock report paying more than $100 extra on out-of-control months.
Still, the right family plan is ideal for those who are diligent about managing their accounts. Contract plans enable consumers to get cell phones at deep discounts and shave some pennies off the per-minute use. But they demand that the caller remains diligent. Most parents I know have enough trouble getting their teens to remember to pick up their socks from the living room floor.
Play it minute by minute
How can you prevent your wireless plan from becoming the black sheep of your bills? There's a movement afoot in the cellular world that bears a striking resemblance to something that has brought parents peace of mind in credit card land: prepayment.
Prepaid credit cards -- essentially a Visa or Mastercard gift card -- offer the convenience of traditional credit cards but with strict spending limits set by the cardholder (or the cardholder's parents). These cards aren't a new idea -- but the audience is. Perhaps you've heard of "secured" credit cards. They were the lending industry's answer to customers with shaky credit history. The user sends in a security deposit that keeps him within preset spending limits and helps him build a habit of on-time payments. Then parents discovered that it was a great way to keep Muffy from going on a spending spree. Now the trend is going gangbusters. According to TowerGroup, bank-issued gift cards will reach $300 billion in sales next year -- another study found that nearly 80% of those ages 18 to 34 have used a prepaid card.
Prepaid cell phone plans once were also the domain of those with lousy credit. Today they're ideal for kids who lack an adult's impulse control and access to cash. Industry watchers say it's the fastest-growing wireless segment. I can see why.
The concept is refreshingly simple: Buy a phone (available at places like Target (NYSE: TGT ) , Wal-Mart (NYSE: WMT ) , 7-Eleven (NYSE: SE ) , Safeway (NYSE: SWY ) , Rite-Aid (NYSE: RAD ) , and Best Buy (NYSE: BBY ) ) and a batch of minutes (from $10 to $100) and start dialing. There's no credit check, contract, and -- if you're older than 13 -- no parental signature necessary. When the minutes run out, customers can buy more via the Web or a prepaid card (with a PIN number on the back), or by calling customer service.
Prepaid cell phone plans are offered by all the majors -- like Cingular Wireless, Verizon (NYSE: VZ ) , AT&T (NYSE: T ) , and TracFone. Even though signing up with a prepaid cellular provider can be a short-term commitment, don't treat the decision fleetingly. Many plans look like their contractual brethren, and that can be a problem. Depending on how you use your minutes -- off-peak, in-network, or out-of-plan -- you could eat up your money faster than necessary.
For the short attention span of teens and financial writers, Virgin Mobile's Pay-As-You-Go prepaid cell phone service, which runs on Sprint's (NYSE: PCS ) Nationwide PCS Network, is about the easiest and most transparent plan I've seen advertised: Buy a phone, activate it (it comes with $10 in already-loaded minutes), and pay 25 cents a minute for the first 10 minutes of use each day, and then 10 cents a minute thereafter. No taxes (they're built into the per-minute price), no 45-cents-per-minute calls (the phone won't roam), no credit check, and no contract handcuffs. The company's slogan -- "Live without a plan," explained in humorous detail on www.livewithoutafamilyplan.com -- is about the only situation when you'll find a Motley Fool nod in agreement.
That said, there is a time (after your teen has demonstrated his grown-up ways) where a family or individual cell phone plan and a regular credit card make sense. But until then, setting limits with the newer offerings in the prepaid arena can help parents safely usher their teens into a world where most service providers bank on their inability to show any restraint.
And best of all, it keeps mom and dad from a $600 shocker.
Next week, Dayana Yochim will give parents some guidance on having "the talk" with their kids. The "money talk," that is.
Dayana Yochim has a cell phone but is mortified every time it rings in public. She once was slammed with a $258 phone bill -- $210 more than she expected. You can send Dayana feedback via email and view her investments and profile. The Motley Fool is made up of individual investors writing for investors -- some of whom are on speed dial.