Prepaid credit card companies are enjoying significant growth in business, thanks to tightening credit and a continued sluggish economy. Growth is especially noticeable in urban areas among concentrations of lower income earners who do not maintain traditional bank accounts. There are quite a number of reasons for this, which we’ll discuss in the following paragraphs, but to start we must define what a prepaid credit card is.
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According to a February 2011 report by Fox Business, prepaid credit cards don’t actually exist. Their logic is sound when you consider the fact that, by definition, “credit” is a condition of lending someone money they don’t already have. Since prepaid credit cards are loaded with consumer funds upfront, they are not technically credit based. Rather they are a hybrid combination of a checking account and a bank debit card.
Why Prepaid Credit Card Companies Use the Term
It’s no secret that prepaid credit cards are marketed specifically at people who cannot obtain traditional credit cards for whatever reason. It’s also no secret that among these groups of people, having a credit card is considered a status symbol because they are so hard to get. By calling their instruments credit cards, prepaid credit card companies are playing into the psyche of America’s consumers and making them believe they’re getting something they’re actually not.
This type of marketing tactic is nothing new. All sorts of companies in just about every industry do the same thing by trying to present hat they’re selling in the most positive light. Most of the time claims made by marketers are stretched right to the very limit of truthfulness. Such advertising tactics are successful because consumers are ignorant enough to believe them. In the case of the prepaid credit card companies, they get away with using the term because most of their customers don’t understand how real credit works.
How They Make Their Money
If a prepaid credit card is nothing more than another form of a checking account and debit card, one wonders how prepaid credit card companies make their money. We can explain it in one word: fees. In other words, every time you use your prepaid credit card there is a fee associated with it. You might pay one dollar for every transaction that doesn’t require your PIN that number. Transactions that do require your PIN might be charged $1.50.
A 2009 report from Consumers Union highlights some of these credit card fees and shows how large they can be. While some fees can be as low as the previously mentioned one-dollar transaction fee, others can be as high as a $99.95 activation fee for a Millenium Advantage card. Furthermore, there are fees assessed for everything from ATM use to balance inquiries to inactivity.
Prepaid Credit Card Companies Relying on Ignorance
One might also wonder how prepaid credit card companies get away with charging some of the fees they do. Again, the blame can be laid squarely at the feet of consumers.
The vast majority of consumers will never read disclosure forms to find out what the published fees are. While many of the fees might be hidden in the fine print, it is still the responsibility of the consumer to know what he is purchasing and what it will cost him. The fact that consumers don’t take the time to find out is the biggest reason why prepaid credit card companies do what they do.
It’s fair to assume that companies who issue such cards are not doing so out of kindness of their hearts. They are in the business of prepaid credit cards in order to make money. So if consumers are not willing to take the steps necessary to protect themselves, prepaid credit card companies will gladly separate them from their hard-earned cash. The only way to prevent such practices is to diligently compare prepaid credit cards and only choose the ones that provide acceptable terms.
Using Prepaid Credit Card to Rebuild Credit
One final note about prepaid credit cards is directed at those who are using them to rebuild damaged credit. The activity associated with prepaid credit cards is not reported to credit reporting agencies. Therefore, your use of a prepaid credit card will have no bearing on repairing damaged credit.
If you need a credit card to help in rebuilding your credit, a secured credit card is what you’re looking for. Prepaid credit cards are nothing more than cash transfer systems; they are not credit by any stretch of the imagination.
Feel free to make use of our online credit card chaser if you’re in the market for a new credit card.