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Prepaid Credit Cards Trend on the Rise

by on November 27, 2009

With Christmas around the corner, consumers are looking for ways to spend their money on gifts rather than on high Prepaid Credit Cards Trend on Risebank fees, increasing interest rates on credit cards d ATM surcharges and other hidden fees. The Credit Card Act of 2009 has many consumers wondering if banks are purposely raising fees in advance of the new regulations coming in the new few months.

Bankrate.com reports that the average rate offered consumers with a 700 credit score is 11.51% variable rate; up from 10.66% in March. One trend that consumers are exploring is prepaid credit cards. Although these cards have their share of fees as well, the spending control and flexibility have made prepaid cards a growing trend in this credit environment.

How They Work

Prepaid credit cards can be loaded by a consumer with a pre-determined amount of money. The cards have the consumer name, an account number and the familiar logo of Master Card, Visa, Discover or American Express stamped on the front.  There can be substantial fees and charges associated with opening prepaid accounts – anywhere from $5 to several hunderd dollars as well as additional charges each time the card is re-loaded. Some card companies charge ATM fees. It is important for consumers to read the fine print on any credit card they get. Some of the benefits of these types of cards include no interest charges, no credit checks, no bank account required, and no monthly payment. Consumers are attracted to the concept because it helps keep spending in check; once the card is empty it can’t be used again until the consumer puts more money on it. Though cards are accepted at any location that accepts traditional credit cards, it might not be accepted for online purchases or bill pay. Other benefits of a prepaid card include no minimum balance, a 100% approval rating, and can be a good substitute for traveler’s checks. While most prepaid cards do not help consumers build credit history, many cards do have an optional “credit builder” feature that can help consumers saddled with debt or bankruptcy to rebuild their credit histories. Large banks such as Citibank, Bank of America, and Chase as well as smaller companies like Greendot, Account Now and Net Spend issue these types of cards.

Potential Pitfalls

The prepaid concept as an industry is over 12 years old and is gaining new customers every year. In 2008 consumers loaded over 8 billion dollars on prepaid cards more than double that was loaded in 2007. 2009 looks to have even more growth. With that growth has come increased concern from consumer advocacy groups. They worry that college students, minorities and immigrants will end up paying more fees in the long run than if they used a traditional card. Categorized as “unbanked” or “underbanked”, these consumers make up the largest segment of the prepaid credit card industry at 80 million people.

Unregulated Industry

Since the prepaid card industry is relatively new, it has not been subject to most federal regulations. The Credit Card Act of 2009, passed by Congress and signed into law by President Obama in May has provisions regulating traditional credit cards, including consumer protections from rising interest and fees, disclosures of exact account terms, and lengthening the expiration date of gift cards. The bill makes it more difficult for young adults to build credit history by restricting those under the age of 21 from applying for a credit card unless their parents co-sign or they can show proof of income. Prepaid cards allow young consumers the opportunity to build some credit history and learn the responsible use of credit. Another provision of the act is that Congress can direct federal agencies to review and study any other aspect of the credit card industry to determine if other regulatory measures are warranted. Soon prepaid cards may be under the watchful eye of the Federal Government. Until then, they offer many consumers alternatives to traditional credit cards.

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{ 2 comments… read them below or add one }

Patrice Peyret November 28, 2009 at 6:49 pm

Prepaid card accounts are indeed a very promising service for many consumers.

Like any relatively new product, prepaid cards still have widely different fees and features.

We agree that too many prepaid card issuers are taking advantage of their customers by charging them a lot of different fees; we have published a comparison charts at http://starveabanker.com/blog/2009/11/not-quite-r

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Matthew C. Byrd November 29, 2009 at 1:54 pm

Between me and my wife we've had more prepaid credit cards over the years than I can count, including Ready, Greendot, etc. But, the last few years I've found that one is the best for our needs AccountNow Visa. Why? Because I was pleased to discover how well-designed and child's play to use the underappreciated (and widely mocked) AccountNow Visa's are.

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