Prepaid cards could become a more popular payment device among college students after the Credit Card Accountability, Responsibility and Disclosure Act makes it more difficult for them to be approved for credit cards.
A part of the law that is to take effect in February requires people under 21 either to have an adult co-sign a credit card application or to prove they can handle the debt themselves.
"College students now have more of a need for prepaid cards than ever before," said Jerry Welch, the chief executive of the Tampa prepaid card company nFinanSe Inc.
In July the Network Branded Prepaid Card Association, a nonprofit industry trade association, published guidelines for college students who are considering the use of reloadable prepaid cards.
The guidelines advise students, and their parents, to understand the terms and conditions of prepaid cards, become familiar with their security and loss-prevention features and regularly monitor their loading and spending.
Card providers, however, may have difficulty taking advantage of this opportunity without better consumer education about the benefits of using prepaid cards, according to Kirsten Trusko, the trade group's president and executive director.
"One of the challenges is helping people understand what" prepaid cards are and how they can be used, she said.
Another challenge is that consumer advocacy groups have been critical of prepaid cards.
The consumer advocacy group Consumer Union released a report in July criticizing the multiple fees associated with prepaid cards.
John Ulzheimer, the president of consumer education at the San Francisco Web site credit.com, said credit card issuers' marketing departments will probably develop prepaid products this year aimed at students. "We may start to see cards marketed as a 'family' credit card," he said.
The goal, Ulzheimer said, would be to help issuers retain some of the valuable 18- to 21-year-old customer base.
But because prepaid cards generally do not help establish credit with the three major credit reporting bureaus, college students may be reluctant to use them.
"There is value in your credit report and your credit score in having a long history of managing credit," Ulzheimer said, and prepaid cards do not afford that opportunity.
Efforts are under way to enable prepaid cards to build credit, Trusko said, but "there is not a broad offering yet."
Prepaid card provider UniRush LLC has added options to its RushCard and Baby Phat Card to let cardholders build credit histories based on the ability they show to pay bills on time.
The downside is that the product uses the alternative credit scoring serviced offered by Pay Rent Build Credit Inc. in Annapolis, Md.
Alternative credit scoring methods are not as widely accepted as those offered by the three major credit reporting bureaus.
The prepaid card industry will need to continue trumpeting the benefits of its cards to counteract criticism, Trusko said.
The value proposition for parents include the ability to send funds safely and easily and to keep track of how those funds are spent, she said, and for students, prepaid cards "are a great way to help keep young adults out of debt."
But even for credit card issuers that do not market their cards on campuses, colleges offer one of the best opportunities to acquire and develop relationships with new customers.
Gaurav Gupta, the director of the consumer lending and payments practice at Novantas LLC and former executive in charge of Capital One Financial Corp.'s young-adult credit cards, said that eliminating college students from issuers' portfolios may not have a huge impact on their loans but would hamper an important way to attract new cardholders. Students are "a new population coming into the pool," he said.
