Americans are beginning to consider other alternatives to conventional credit cards, industry specialists say. Increasing interest rates, numerous penalties, and surcharges are forcing cardholders to consider other forms of credit to cut back on expenses. Despite the improving job market, analysts are cautioning against premature speculation of a U.S. economic recovery.
More banks and card companies are also approving fewer credit card applications in an attempt to curb massive losses. Experts say that delinquencies are on the rise and charge-off rates are following suit. It is yet unclear if the improving job figures will result to fewer delinquencies in the next few months. Applications for bankruptcies are also increasing, with some 1.2 million bankruptcies during the height of the recession. Pre-recession bankruptcies was only half that figure.
The economic situation is making a growing number of Americans consider other card types to continue credit purchases, albeit, at lower risk to their credit records. Recent months have seen an increase in the demand for debit cards, secured credit cards, and prepaid cards. Unlike conventional credit and debit cards, prepaid cards do not require collateral. Also known as payment cards, this alternative also does not have credit limits.
Industry sources say that most Americans who apply for this type of card have either poor credit records, a history of being rejected by banks, or maxed-out credit limits.
Payment cards operate on a completely different principle from ordinary cards. They function like secured credit cards but cardholders are not required to have a bank deposit to act as collateral. The credit limit of secured cards is equal to the amount of money in the bank deposit. Prepaid cards, on the other hand, have not credit lines. Cardholders have to "load" funds into the card before using it. This allows consumers to control the amount of money they spend using plastic.
Analysts say that payment cards are perfect for Americans who want the convenience of plastic, minus the hassle of skyrocketing interest rates and dizzying surcharges. In a way, they contend, prepaid cards serve as useful replacement for cash. Another benefit of payment cards is that they are usually accepted anywhere major cards are accepted. This allows cardholders to have the flexibility of cash and the convenience of plastic.
However, credit specialists recommend choosing payments cards wisely. Most cards charge extra for ATM services. Card issuers can also require maintenance fees, application, and activation charges.