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Hybrid credit, prepaid cards may offer crunch relief

Consumers trapped in the economy’s credit crunch may soon have some help when the hybrid credit/prepaid card — an alternative payment tool that offers consumers the ability to build credit while avoiding the pitfalls of credit card use —  becomes more widespread, a new study suggests.

Research firm Mercator Advisory Group looked at the new payment genre in a paper released April 6. “The Rise of Hybrid Credit/Prepaid Cards” says that consumers can deposit money onto these new hybrid cards via cash or direct deposit — like a prepaid card — but can also employ credit lines or payroll advance loans, like a credit card. Hybrid cards typically offer credit lines of only $1,000 or less and require cardholders to create a direct deposit account with the card issuer. The low credit limit’s intent is to  satisfy customers’ short-term credit needs.

According to Mercator, hybrid cards will be targeted to subprime and “thin-file” borrowers as a more viable and affordable option for small, short-term payments than other options, such as payday loans.

However, the study says, hybrid cards might also mean greater risks and complications for the issuers who distribute them, because a hybrids’ combined credit and prepaid functions are protected differently under two different federal laws: Federal Regulations Z and E.

Ken Patterson, director of Mercator’s Credit Advisory Service, said in a statement that as downcast consumers in the economic crisis continue to call for credit, the idea behind hybrid cards will start to pick up steam. “Hybrid cards offer consumers the convenience of electronic POS payments with the facility of short-term, low-dollar amount loans,” Patterson said. “The economic climate is certainly supportive of their development, and a number of product approaches are vying to capture this opportunity.”

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Published: April 7, 2009

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