(This is a guest article by David Pratt*)
Recent college graduates and students still in school will now find it much harder to get their first credit card under new Federal credit card rules that went into effect in March. The Credit Card Accountability, Responsibility, and Disclosure Act is meant to protect consumers from unfair credit card billing practices. The law includes rules to help protect people under 21 from going into deep credit card debt at the start of their work career.
The good news is that for many young people, a reloadable prepaid card is a safe and convenient alternative to using a credit card, cash or checks for making purchases and paying bills. Prepaid cards are widely available online or at retailers such as drug stores and grocery stores.
"Increasingly, prepaid cards serve as a powerful tool to encourage financial responsibility for college students," said Kirsten Trusko, President and Executive Director of the Network Branded Prepaid Card Association (NBPCA), a non-profit trade association. "Prepaid cards provide all the flexibility and security benefits of a branded payment card without the risk of running up debt and overdraft charges."
Harder to Get a Credit Card
Under the new rules, people under the age of 21 now have to prove that their income is high enough to make monthly credit card payments. Or, they need a co-signer, such as a parent. What’s more, if you are under 21 and have a co-signer on your account, you will need the written permission of that co-signer to let the bank to raise your credit limit.
In addition, card companies are no longer allowed to market on college campuses. The days of handing out t-shirts, sodas, and posters on the quad in exchange for obtaining filled out credit card applications from students are over.
It’s still possible to get a credit card without a co-signer if you are under 21, but you will have to have a high enough paying job as well as something of a credit history already—through bill payments or a track record of paying a card loan—certainly possible, but out of bounds for plenty of grads, at least in the initial time after graduation.
How Prepaid Cards work
Provided you are 18 and can pass a simple identity check required under the U.S. Patriot Act (which means providing your name, address, birth date, and social security number) it is easy to get a prepaid card. A prepaid card is plastic card that looks like a credit card or checking account debit card. It is issued by a bank and has an account number embossed on the front and embedded in a magnetic strip on the back. It typically is tied to either the MasterCard or Visa debit network. These cards are widely accepted by hundreds of thousands of merchants nationwide and around the globe for transactions such as buying groceries, clothes, gasoline, and eating at restaurants. They can be used in person or online with a signature transaction or by using a PIN number.
But instead of making purchases on credit, you "prepay" for those purchases by putting your own money into the card account ahead of time. Thus, you are drawing upon your own funds rather than borrowing money or paying interest charges. You can add money at a Western Union agent by handing cash to the agent who then for a small fee, deposits that cash into your card’s account. Similarly, you can buy a Green Dot Money Pak for $4.95 and transfer the money from the Green Dot Money Pak into your card account. You can also take advantage of direct deposit to have all or part of your payroll check deposited directly to your prepaid card account. In this way, you can reload your card with funds and continue to use it indefinitely.
When shopping for a prepaid card program, check that your funds are insured under the FDIC program. Under MasterCard and Visa policies you should be protected if your card is lost our stolen. If reported within 48 hours your liability will be limited to $50 under those policies and capped at $500 if you somehow failed to report the lost or stolen card as late as 60 days out. But if you waited longer than that, you could be out whatever amount you had on the card.
Advantage for Budgeting
Prepaid cards do have some fees, which vary from card to card. These typically include an activation fee, a monthly account fee, and per transaction fee. Still, compared to alternatives such as check cashing fees, overdraft fees, and interest payments, prepaid cards can prove cost effective for many people.
A prepaid card can help you track your spending and live within a budget. Like paying for things with cash, you have to have enough money on your card to cover your purchases. You can check your balance and review your transaction history online, via ATM machines, by calling a customer service number, or even through mobile text messaging, with most prepaid card programs.
In today’s economy, more people are limiting their use of credit cards and just getting one credit card with lower credit limits, or favoring debit cards—either check cards or prepaid cards.
*About the author: This guest post is contributed by David Pratt, marketing director for MiCash.net who writes on the topic of prepaid debit cards. You can reach David at dpratt (at) micashcard . com.
*Image Credit: Photograph by jepoirrier [via Flickr Creative Commons]