Consumers Switching to Prepaid Credit Cards

People can see it on YouTube, Twitter, and just about anywhere in the Internet - consumers are no longer happy with their banks. Major card issuers have been cutting debt limits without warning, raising interest rates, and even writing off clients for seemingly small reasons. Now, consumers are finding a way out of traditional bank accounts and credit cards in favor of a more versatile plastic: prepaid cards.

Consumers usually purchase them from retailers and load them with money so they can be used at checkout counters or to pay bills online, just like traditional credit cards. Consumers may also load their cards from directly deposited paychecks, giving them more options in terms of payments. However, what makes prepaid card issuers successful are an advertisement phrase financial institutions normally do not use: no credit checks necessary.

Since consumers pay for their cards before using them, companies will not charge them with high interest rates if they have poor credit rating. So it is no wonder why profits by such companies have more than doubled last year compared to its preceding year. Consumers loaded $8.7 billion when recession heightened in 2008, up from about $4 billion in 2007.

American Express, Visa, MasterCard, and Discover are the major issuers of this new type of plastic. According to Mercator Advisory Group, a financial research firm which focuses on the payment industry, such cards can be used anywhere which makes them more appealing to consumers.

However, advocacy groups warn that the cards carry an assortment of fees, which could be heavy on most people's pocket. Nevertheless, prepaid credit cards have become popular to those who cannot get traditional bank accounts, immigrants in particular who do not yet have sufficient credit history to earn the trust of banks. Some experts say it is a better option for them, instead of relying on expensive cash-checking institutions.

High credit card interest rates and bank overdraft fees are also major reasons for many consumers to look for better alternatives. Additionally, college students are increasingly using prepaid cards, their numbers are expected to go up next year when students below 21 years of age cannot sign up for a credit card without an adult co-signer.

Those cards used to be stepping stones toward getting regular bank accounts, but with their increased functionality, experts say they are no longer far from getting into the financial mainstream. Finance analysts add that those cards also prevent consumers from racking up debt unconsciously, since they cannot use prepaid credit cards unless they load it with money.

However, advocates advise consumers to be very cautious since activation fees alone could go up to $100 for some issuers.