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Prepaid Debit Cards against Bad Credit Debt Increase

[Thursday, February 24th, 2011]

Prepaid debit cards keep gaining popularity not only among young people with no credit history, but also among other categories of consumers, people with bad credit included. Prepaid reloadable cards are less expensive and risky, they are easier to get, and a vast majority of debit cards provides guaranteed approval with no credit check. This switch to prepaid debit may be the result of credit card usage dynamics over the last year.

From 2008 to 2009 American consumers reduced their credit card debt more than $93 billion. Sounds like a very good thing, but according to the data analysis this is not as exciting as it seems.

Cardholders did not become more careful. On the contrary number of late and missed payments grew thus leading to an increased number of debt charge-offs.

Consumer credit card debt in the last quarter of 2008 equaled $969.3 billion and in the last quarter of 2009 it fell to $876.1 billion. It is a sign of an economically steady society when consumers pay back more. But the current analysis revealed that debt charge-off rate in the third quarter of 2009 reached its highest since 1985. Charge-offs take place in case consumers file for bankruptcy or in case their credit card debt is 180 days past due.

This research showed that only around 10% of this decrease in the consumer credit card debt was associated with payoffs and that the majority of them took place in the beginning of the last year. The rest 90% was related to charge-offs.

On the average, an American family has nine personal credit cards. Ever since the recession started, practices of issuing companies and usage of credit cards have been carefully watched.

Over the last year credit card issuers have tightened credit terms. Banks cut spending limits, allowing consumers less access to funds, and increased interest rates. As a result many switched to prepaid debit cards.

To protect consumers a whole range of federal regulations for credit card companies was released and recently went into effect. Even more measures are being proposed and might soon go into effect.

And what may help consumers start paying off their credit card debt is economic recovery. But consumers also need to learn from experience, develop better credit card habits and be more responsible with purchases charged to credit cards.

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