The use of reloadable prepaid debit cards is exploding.
Consumers loaded $56.6 billion on the cards in 2010, and they are projected to load $168.7 billion by the end of this year according to Forbes Magazine. The Mercator Advisory Group, which advises businesses selling prepaid cards, projects consumer loads to reach $334 billion annually by 2018.
Why this growth? It began with the 2008 financial crisis when millions of Americans found themselves without bank accounts and credit. Some lost the ability to obtain credit; others developed an aversion to it. Many consumers could not afford the fees to maintain a bank savings or checking account. Prepaid debit cards became an alternative method for non-cash payments. Now, many people use them in place of traditional checking accounts.
Prepaid debit cards look like credit and traditional debit cards, but they are not tied to a bank account. You buy a card, often in a store, and add or “load” money on to it as needed. You can:
- Have your paycheck direct deposited to it.
- Make purchases at stores or on-line.
- Withdraw cash at ATMs.
- Make on-line bill payments.
- Monitor transactions on line or with a mobile app.
These days, it’s not just underbanked people using prepaid debit cards. Consumers of all financial situations are utilizing the cards to:
- Control spending and live within a budget.
- Avoid credit card debt.
- Monitor purchases made by and for vulnerable individuals such as seniors with dementia or disabled individuals.
- Teach children responsible use of plastic money and keep them from ratcheting up credit card debt.
- Give money. Since they can be used almost anywhere, they are a popular alternative to store gift cards.
Despite their flexibility and ease of use, you need to be careful when selecting a prepaid debit card. Many are expensive to maintain and have few or no consumer projections.
Thanks to the work of consumer advocates, however, more cards now have affordable or no fees and offer the same consumer protections as bank debit cards. This includes Federal Deposit Insurance Corp (FDIC) coverage on balances, and no liability if the card is lost or stolen. Many cards offer access to no-fee ATM networks. If your card has FDIC coverage, government benefits can be direct deposited to it.
When looking for a reloadable card, pay attention to the schedule of fees. In addition to monthly maintenance fees, some cards have fees for activating the card, loading money, making a purchase with a PIN, using an ATM, checking the balance, and even calling customer service. If a company isn’t transparent about the fees, look elsewhere.
Some drawbacks to know about prepaid debit cards include:
- They don’t allow you to develop a credit history.
- Car rental companies won’t accept them for a security deposit. For that you need a traditional credit or debit card.
- Some merchants, such as hotels, put a hold on the card for several days until payment clears. During the hold you don’t have access to those funds.
- Gasoline vendors put a hold on pay-at-the-pump purchases. I have seen gas retailers put as much as a $100 hold on a $30 gas purchase. If you pay for your gas inside, however, there is no hold.
Consumer Reports recently rated prepaid debit cards. The ones at the top of its list provide FDIC insurance and don’t hold consumers liable for errors such as unauthorized charges due to fraud. Fees and access to free ATM networks vary, so be sure to check these out before you buy. To connect to Consumer Reports’ Prepaid Cards Buying Guide and its ratings, click HERE.
This blog is published to provide you with general information only, and is not intended to provide specific or comprehensive advice. Money Care, LLC has not used or evaluated any of the prepaid debit cards recommended by Consumer Reports and thus does not make any recommendations. Money Care, LLC encourages individuals to seek advice from competent professionals when appropriate. The names of the individuals in this article have been changed to protect their privacy.