Young, gifted and in the black: teens denied debt

Continuing our series on saving for children, Sam Dunn sees what banks and building societies have to offer teenagers

Teenage kicks can put the boot into your finances. From mobile phones and iPods to trainers and ripped jeans, today's young people have more to spend their money on than their parents ever dreamt of at the same age.

And with a remarkable £2.7bn in their pockets each year (according to Mintel's annual survey of teen finances), teenagers are powerful consumers.

"Children emulate adult behaviour at a younger age than in previous generations," says Jenny Catlin of Mintel. "Older children [now] have a more flexible attitude to savings and debt - they tend to spend and enjoy their money."

We all know that teenagers don't need any encouragement to spend, but getting them to save is another thing. Mintel's researchers found that four in every 10 of the 11- to 16-year-olds they interviewed admitted to being "no good" at saving. This may sound worrying but the figures are, in fact, a slight improvement on last year.

Vola Parker of the Personal Finance Education Group, an organisation campaigning for improved financial education in the classroom, believes that teenagers are motivated to learn about saving because "to do so can lead to greater buying power".

While a savings habit developed at a young age will bode well for the future, the ability to manage daily spending is just as important, she adds.

Step forward, high-street lenders with their "youth accounts". Most offer a cash card to customers aged at least 16, allowing them to draw money from an ATM.

But beyond this basic facility, what teenagers get from their bank varies wildly - from in-store debit cards and direct debit facilities, to the ability to purchase cinema tickets by phone or monitor their accounts online.

While account holders under 18 won't be allowed to go overdrawn, they will be offered a debit card, usually a Visa Electron or Maestro (formerly Switch) Solo. These can be used only when sufficient funds are in the account.

However, these two cards are not always accepted by shops or by telephone booking services. (Outlets accepting Solo are particularly limited.) Young card holders should check that retailers take their cards before they try to buy, especially when shopping online. Amazon and Ryanair are among the few big organisations on the internet that will take Visa Electron.

It's tempting for parents simply to set up an account for teenage children with their own bank. But it's better to look at a range of accounts first, to see what services are on offer from different providers.

For example, Lloyds TSB won't allow a Visa Electron card to be used to buy goods over the internet or by phone, while Barclays (Electron) and NatWest (Solo) permit both transactions.

Not every lender is keen to encourage junior savers to spend money. Nationwide has an ultra-conservative policy and will not let under-18s use their cash card in stores, over the phone or on the internet. It does offer a cheque book but this can only be used to buy goods by post.

"We appreciate that there may be a growing demand for [spending power] among our younger customers," says spokeswoman Julie Darroch, "but it is important for us to encourage responsible lending."

And surprisingly, not every bank is interested in teenagers in the first place. Internet banks such as Cahoot, the online arm of Abbey, and Egg may appeal to computer-savvy kids, but it is sophisticated, and wealthier, adult consumers who form their target market.

Cahoot, for example, specifies that customers must be at least 21 years old, although this policy is being reviewed.

Egg's savings account is available to 16-year-olds but it offers only a cash card and pays interest at a paltry 1.75 per cent.

Since the rules applying to youth accounts mean they will always be in the black, the interest paid on them is even more important than on adult accounts. Youngsters can get 3.5 per cent at Lloyds TSB and 3.35 per cent at NatWest - compared with 1 per cent at Barclays.

Up to the age of 16, those banking with Nationwide earn 4.75 per cent on savings in their Smart account. Thereafter, they can switch to the building society's Flex account. But since this pays only 0.5 per cent interest on amounts below £500 and 1.5 per cent between £500 and £999, they would be better advised to leave their savings in the Smart account.

Alliance & Leicester offers a healthy 4.5 per cent on credit but its Young Workers account is geared to customers earning a regular wage from an early age. It requires a minimum monthly deposit of £100 - a tall order for young people still at school, who are likely to be working (if at all) only at weekends.

One thing parents of teenage children don't have to worry about is the risk of their offspring running up debts on credit cards. Lenders are forbidden from marketing these to anybody under the age of 18.

Next week: accounts for students