A recent study by Javelin Strategy & Research found consumers are starting to favor a different type of plastic. The financial industry research group found that the use of reloadable prepaid debit cards is on the rise as the use of credit cards has started to dwindle. Prepaid cards are essentially traditional debit cards without a bank account.
“We do get a lot of interest in these types of cards,” Credit.com spokesperson Gerri Detweiller tells MainStreet. She agrees that the cards are “very popular” with unbanked or underbanked individuals who don’t qualify for a traditional line of credit. They’ve also become a frequent choice of college students, thanks, in part, to the Credit Card Accountability, Responsibility and Disclosure Act, which prohibits companies from issuing credit to anyone under 21 unless the applicant has a stable source of income or a willing co-signer.
Moreover, Detweiller points out that low-income individuals who can’t fund the credit line for a secured credit card often opt for a prepaid debit card instead, which enables users to put a specified amount of money on a plastic card that can be accessed immediately.
“With a prepaid card, you can go out and spend the money tomorrow,” Detweiller explains. This differs from a secured credit card, which requires customers to put down a sum of money upfront that will match their line of credit. Of course, this money isn’t intended to pay off the card’s existing balance; it’s meant to serve as collateral and subsequently minimize default risks. As such, those living to paycheck to paycheck typically have to forego a secured credit card since they don’t have to funds to insure the credit line.
However, both Detweiller and other industry experts maintain that those in the market for new payment methods shouldn’t be swayed simply by a prepaid card’s accessibility. For starters, it will have no effect on your credit score as it is essentially a gift card that can be used for general purposes.