If you are not familiar with them, a prepaid debit card is a card that is issued by a financial institution that is preloaded with funds. A prepaid debit card works in the opposite way that a regular credit card works, in that instead of buying something with borrowed funds (that’s what you are doing when you use your credit card), you buy things with funds that have already been paid.
The main advantage with this type of card is that it allows the user the convenience of a credit card without going into debt. You can use them to purchase items online or in person, but since you must load them with funds before using them, you never spend more money than you have… But the prepaid debit card world is not all unicorns and rainbows.
Mitchell Weiss, co-founder of the University of Hartford’s Center for Personal Financial Responsibility and author of Life Happens: A Practical Guide to Personal Finance from College to Career, says that “These cards prey on the under- and unbanked, who mistakenly believe they’re more economical than having a traditional checking account,”.
While popular with people who do not want to use a bank or those who have credit issues, many of these prepaid debit cards fall short of the promise of saving the consumer money when compared to a checking account. The majority of these cards are riddled with so many fees and charges that as Anisha Sekar of Nerdwallet concludes, it “is very rarely the case” that prepaid debit is cheaper than checking.
Another big selling point of the prepaid card is that they help consumers avoid debt by capping their spending. Mitchell Weiss continues to say that “In my view, this perpetuates the problem by infantilizing consumers, they are far better-served in the long run by taking responsibility for budgeting their spending with credit cards, even if that means directing the card company to limit your line of credit.”
If after hearing all of this, you still have your mind set on using a prepaid debit card, there is one major concern you should consider before you decide on which card to get…
“Over two thirds of prepaid debit cards charge a monthly fee…”
Fees
According to ABC News, Last year, prepaid cards were used in 1.3 billion transactions that totaled $77 billion, according to the Center for Financial Services Innovation. By the end of 2014, a projected $167 billion will be loaded onto prepaid card accounts. But the lack of consistency in the names and descriptions of fees associated with these cards can leave consumers finding it nearly impossible to compare the different cards.
Over two thirds of prepaid debit cards charge a monthly fee. Roughly half of those can be waived if you have a paycheck or benefits direct-deposited onto the card, but some of the thresholds are prohibitively high. But monthly fees should not be the only factor you consider when choosing a prepaid debit card. Some cards that flaunt no monthly fees add in all sorts of other fees. At the same time, some cards that do charge monthly fees offer many other services and features at no cost. For example, the Chase Liquid card charges $4.95 a month (waived if you already have a Chase bank account you link to the Liquid) but gives users access to many of the services regular checking account customers get.
There are some fees common to most all of the prepaid debit cards and checking accounts alike… the use of out-of-network ATMs. However, some card issuers go overboard with their fees and attach them to nearly everything you do. Here are some of the worst fees that should be avoided at all costs:
Activation/Purchase Fee
There is no doubt that you are going to pay something to use your card, but you shouldn’t’ have to pay to get the thing. Out of 24 prepaid debit cards that Time Business recently reviewed, 10 cards required that you actually pay a fee just to purchase the card, this does not include what you have to “load” on to the card.
Two of the cards reviewed, the “Baby Phat” and KLS “RushCards” both cost $14.95 upfront. Four other RushCards had a purchase price of $9.95.
Point of Sale Fee
This fee, a charge you receive just for using the card for any purchase you make, should be avoided as well… a charge to use your own money? Really? Some cards that do this only charge for PIN-based or signature transactions; others charge for both, though the price sometimes differs depending on the type of transaction.
Inactivity Fee
Here’s a good one… the cards that have an inactivity fee actually charges you, sometimes as much as $5.95 a month, if you fail to use your card for an extended period of time (usually 180 days or more). There are some cards however, that start charging an inactivity fee if the card goes unused for as little 90 days. Quite a few others will close an account with a $0 balance after two or three months of inactivity.
So while a prepaid debit card might seem like a good alternative to using a bank, the fact is that checking accounts, now and for the imaginable future, are almost always the best bet for people who want to take full advantage of the number of things they can do with their money. Sure, there are bad bank accounts but it is very unlikely that a prepaid debit card is your best alternative.
