According to the Federal Reserve, about one in 12 families do not have a bank account. Mistrust, cultural and language barriers are only a few reasons why people have been opting out of traditional banking institutions. Regardless of their reasons, many individuals are substituting prepaid debit cards as an alternative to carrying cash, using money orders or bank issued debit cards. While some proponents of these cards believe they provide financial independence, these cards are not without risk or expense.
How People are Using Prepaid Debit Cards
In an attempt to go green as well as save money, many employers have begun loading paychecks onto debit cards that can used to pay bills, buy groceries and more. Check cashing places have begun to sell prepaid cards that can be loaded with money from paychecks and income tax checks. Buyers of structured settlement annuity payments and companies that provide settlement advances will issue their lump sum payment on a prepaid card. The cards provide users with immediate access to their cash while helping them to secure their money from theft. Some parents are using these cards to track their teen’s expenses or teach them financial responsibility. Some advocates suggest using prepaid debit cards as an alternative to traveler’s checks, cash or credit cards when traveling.
The Benefits of Prepaid Cards
Traditionally, someone who sells their annuity for a cash lump sum does not have a checking or savings account, they often receive their lump sum in the form of a check from the buyer of the structured settlement payment and then cash it at a pay day loan location and pay an excessive fee. The prepaid may help them avoid this fee. Additionally, some cards offer consumer protection against theft or loss–something cash can’t do. The cards allow users to pay bills electronically and avoid the cost of money orders. In most cases, the spending is limited to the balance of the account so expenses are kept in check. Unlike cash or money orders the cards have statements to track expenses. It also gives the user the ability to shop online. So in many ways it does provide financial freedom.
The Risks of Prepaid Cards
Prepaid cards are not created equally. While some are co-branded with major credit card companies and provide fraud protection, consumer advocacy group Consumer Union cautions that these protections are not uniformly applied. Some debit cards are not insured by the FDIC either. The fee structures of these cards vary and some are very costly. It is not uncommon for these cards to charge monthly fees in addition to the fees they charge for making purchases, deposits, cash withdrawals, bill payments, overdrafts and checking your balance. There are also fees for inactivity and customer service. In addition, there may be a minimum balance requirement, and in the case of the Kardashian sister’s new debit card, a yearly fee. While some cards claim to build your credit, most do not and the ones that do are extremely expensive.
What to do
Advocacy groups state that consumers should read the fine print before purchasing one of these cards. Compare cards to determine what the fees will be for at least 6 months to a year. Familiarize yourself with transactional restrictions in addition to the minimum balance requirements. When using the cards for travel look to see if it allows foreign transactions as well as check the exchange rates. Some debit cards charge higher fees oversees for withdrawals, purchases or balance inquiries. Consider using a bank or credit union instead. They offer more sophisticated consumer protections, accounts are FDIC insured, the fees should be lower and the money may earn interest thereby making it work for you. Many banks are offering budget accounts to lure lower income families back to banks.
