Young Americans Bank in Denver has not turned a profit since the cable television pioneer Bill Daniels founded it 19 years ago, and its loan portfolio is about the size of one large car loan.
But the $14 million-asset bank says it is not in business to make money. Instead, its only mission “is to educate kids about how to manage money,” said Richard Martinez, the bank’s senior vice president. “We want them to get comfortable with as many bank products as possible, before they go out in the real world.”
The tiny bank offers checking and savings accounts, certificates of deposit, loans, and credit cards to people under the age of 21.
The credit cards have a $100 limit and require an adult co-signer. Before young customers can start charging, bank employees show them what a credit report looks like and explain how too much debt, or failure to repay debt, can damage the reports and limit future access to credit, Mr. Martinez said.
“While there is only a $100 limit to this card, it is the beginning of their credit history and their future, and we want them to take that very seriously,” he said.
Young Americans cannot track the credit histories of customers who have since left the bank, but Mr. Martinez said a number of appreciative parents of college-age customers have called to thank the bank for teaching them to be responsible. The parents usually call after hearing horror stories about their kids’ college friends racking up significant debt, he said.
“You hear about putting on the ‘Freshman 15’ in pounds, but now freshman are also putting on thousands of debt with credit cards,” Mr. Martinez said.
Young Americans’ counseling programs are becoming increasingly important, he said, as more and more young adults are running into problems with credit card debt.
The number of bankruptcy cases filed in U.S. courts rose 27% last year, to 2.04 million, according to the American Bankruptcy Institute. Though statistics on specific age groups are scant, a widely cited 2002 study by Harvard University said that 188,000 people ages 18 to 24 filed for protection from creditors in 2001 — nearly double the number who filed in 1992.
Consumer advocates say that the number of filings by young people has only risen since then.
Mr. Daniels, who died in 2000, came up with the idea of a bank for young people after reading a story about how a group of Denver students who needed financing for a class project could not get approved for a bank loan. He started Young Americans in 1987, and the bank survives today largely through subsidies from Mr. Daniels’ foundation.
Young Americans also counsels young people before issuing them debit cards or lending them money. Even though parents must co-sign loans, the bank will not lend customers money unless they can pay it back themselves.
Loan applicants complete a budget worksheet to determine if they have enough cash flow from their allowance or jobs to make the monthly payments; if they do not, Young Americans encourages them either to do more chores to get more allowance, or to work more hours at their jobs.
The average loan size is $1,400, and the loans generally are used to buy used cars or personal items. Young Americans’ loan portfolio was $52,000 as of Sept. 30. It also had $12.9 million of deposits, most of it in savings accounts and CDs.
According to Mr. Martinez, most of the bank’s customers are Colorado residents who learned about the bank through financial literacy programs offered in schools and at summer camps by a nonprofit sister company, the Young Americans Center for Financial Education.
The bank also attracts out-of-state customers who learn about it through news reports, the Internet, or word of mouth, he said.
Laura Fisher, a spokeswoman for the American Bankers Association’s Education Foundation, said banks that offer credit cards to teenagers (with parents as co-signers) and young adults generally do not counsel them beforehand, but many teach kids about managing credit card debt in financial literacy programs they offer in schools.
Also, the trade group’s members also participate in its annual Get Smart About Credit Day and Teach Children To Save Day, which are held in schools nationwide, she said.
“If banks can help kids learn how to manage credit cards, they are more likely to be better customers for the bank in the future,” Ms. Fisher said.
Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group, said that all banks should counsel young people about credit card debt before issuing cards to them — even if parents co-sign.
“Just as you shouldn’t have a driver’s license before you’ve taken driver’s ed, you also shouldn’t have a credit card before you’ve taken financial ed,” Mr. Mierzwinski said.
