Feature

Banking: The pros and cons of prepaid cards

Are prepaid debit cards the way of the future?

Watch out for prepaid debit cards, said Ann Carrns in The New York Times. These cards, issued by stores, banks, and companies like American Express, are becoming a popular alternative to old-fashioned checking accounts for people who don’t have bank accounts. Cardholders like them because they can use them for direct deposit and to pay bills, just like with a checking account. And this year alone, Americans are expected to load more than $200 billion onto prepaid cards, with 13 percent of the country using them. But unlike checking accounts, which carry up to $250,000 in federal deposit insurance to protect customers from bank failure, prepaid cards have no such safeguard. Instead, most prepaid cards offer “pass through” deposit insurance, by pooling their money in third-party bank accounts that are backed by FDIC insurance. But American Express relies on state laws to back its customers’ card assets, which can create a confusing and inconsistent patchwork of protections for cardholders.

Still, prepaid cards may be the way of the future, said Hadley Malcolm in USA Today. Fewer customers are opening up traditional bank accounts, and prepaid cards offer convenience and fewer fees. According to the FDIC, more than 20 percent of Americans are “underbanked,” which means they don’t rely on checking and savings accounts. Card issuers have been quick to exploit this opportunity, and now offer prepaid cards for every occasion. Some banks promote cards as more efficient and safer alternatives to cash, with options geared to collecting tax refunds, drawing unemployment benefits, and letting parents pay out their kids’ allowances.

Don’t let the convenience fool you, said Scott Gamm in TheStreet.com. “Prepaid debit cards might seem like a wise financial move on the surface,” but in reality, they “serve little purpose in personal finance.” Prepaid cards might claim to have lower fees than checking accounts, but it’s hard to find one that doesn’t nickel-and-dime the customer with hidden fees. “The monthly fees could be as high as $3 per month and an additional $2 just to load money onto the card.” They’re also useless if you’re trying to build credit, “since none of the activity on the card is reported to the three credit bureaus, Experian, Equifax, and TransUnion.” After all, with prepaid cards, you’re just using your own money, “which doesn’t tell the credit bureaus anything about how you manage other people’s money.” If you’re reluctant to open a bank account, check out a credit union first. Their fees are “typically kinder” than those of normal banks, and they offer better bang for your buck than prepaid debit cards.

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