As the recession encourages less reliance on credit cards by both consumers and banks, some experts predict that prepaid and secured cards could see their popularity grow.
Prepaid and secured cards are typically marketed to consumers who don't have enough credit history to qualify for a regular credit card. However, the current economic troubles mean an increasing number of consumers may find that credit cards have moved beyond their reach. According to Judith Rinearson, a stored value expert and partner with the law firm Bryan Cave, tightening credit could encourage a move toward prepaid and secured products. "I think there will be an increase of interest in these cards," she says.
Unlike debit cards, which require a checking account, both prepaid and secured cards do not typically need to be tied to a consumer's bank account. Network-branded prepaid and secured cards bearing the American Express, Visa or MasterCard logo can be used anywhere that plastic payments are accepted.
Prepaid cards (similar to the popular retailer-issued store gift cards) are loaded with money and therefore do not require the cardholder to pay any bills. Meanwhile, secured cards require the borrower to first deposit money into an account held by the card issuer, who then provides a credit card with a spending limit equal to that deposit. That protects the lender in case of default. "A secured credit card is still technically a credit card," Rinearson says, with the cardholder receiving a regular bill as they would with a more traditional credit card.
For consumers interested in a prepaid or secured card, there are a few things to consider:
In addition to prepaid and secured cards, Rinearson also highlights the possible introduction this year of a new type of short-term credit card that would enable banks to review and re-price based terms annually based on the cardholder's payment behavior. Apparently, discussion about these short-term credit cards is taking place behind the scenes, with Rinearson hearing them discussed during a conference call with prepaid card lawyers.