In recent years, people have come to view credit somewhat differently. They are also more frequently turning to prepaid cards instead of using traditional bank accounts and high interest credit cards. According to a Federal Reserve study, the use of prepaid cards rose a whopping 21.5 percent from 2006 to 2009. In addition, the study indicated that prepaid cards experienced the most rapid growth among all non-cash payments in the United States. There are many reasons why prepaid cards are becoming increasingly popular among consumers—here are a few of the most significant.
Alternative to Credit Cards
Credit cards are notorious for their high interest rates and sometimes low credit limits, and consumers with less-than-perfect credit may have trouble getting approved for a credit card in the first place. If a consumer with a low credit score is able to get approved for a card, it will often come with high interest rates, annual fees, and very few of the rewards that are usually extended to customers with excellent credit.
Prepaid cards, on the other hand, are entirely funded by the cardholder—so he or she is completely in control of how much money is on the card. Those who use prepaid cards do not have to worry about the late fees, interest rate charges, and overdraft fees that are so common with credit cards or traditional debit cards. If the prepaid card does not have enough available funds at the time of a transaction, the merchant will simply decline it.
Ease of Use
Prepaid cards are extremely convenient and easy to use. Experts estimate that nearly 100 million Americans are unbanked or underbanked, meaning they have no bank account at all or the account they have does not meet their needs. As a result, these consumers often look to alternative financial products, like short-term loans.
Prepaid cards are branded with a major credit card issuer’s logo—MasterCard, Visa, or American Express, for example—and are accepted at most major retailers, just like a debit or credit card. Moreover, prepaid cards can be purchased and reloaded at nationwide stores like Target, Walmart, and other big chains.
In addition to the convenience of using prepaid cards, they also come with the same consumer protection benefits of any card bearing the major network logo. In the event your prepaid card is lost, stolen, or misused, you will likely receive some protection from the card issuer’s zero-liability and fraud protection policies.
Alternative to Bank Accounts
Another notable benefit of prepaid cards is reduced fees. While many believe a bank-issued debit card tied to a bank account is the same or better than prepaid alternatives, this isn’t always the case. A 2011 report conducted by The Pew Charitable Trust indicated that 89 percent of the largest banks’ checking accounts included fees of some sort, and consumers are often blindsided by these fees.
Prepaid cards also usually come with fewer surprise fees or charges that often occur with bank accounts. A recently released Bankrate.com report showed that banks charge non-customers nearly $3 per transaction to withdraw money; this is in addition to fees charged by out-of-network ATMs, putting the cost to withdraw your own money from some ATMs at more than $4.50 per withdrawal.
This is just one example of just how expensive it can be to have a bank account, but even this does not include maintenance, overdraft, transfer, and other bank fees. Many prepaid debit cards offer fee waivers for direct deposit, surcharge-free ATMs, and a variety of other ways to save on fees.
Tracking Spending
For consumers looking to get a better grasp on their spending habits and rely less on credit cards, prepaid cards are definitely worth considering. Since prepaid cards allow consumers to only spend what’s available, there is less opportunity to spend money you don’t have or make impulse purchases.
Parents also find prepaid cards to be an excellent way to teach their children about responsible spending. Teens can see the relationship between the money they’ve loaded onto the prepaid card and how much they have spent. Parents can load the card and track spending, using it to teach their kids about financial responsibility while offering a safety net for emergency expenses. Some prepaid cards even come with the option to receive text message alerts any time the card is used.
Prepaid cards are not completely devoid of fees—you may have to pay an activation fee, reload fee, or maintenance fee. Prepaid cards are also exempt from the laws that pertain to bank-issued debit cards, but there are often ways to avoid these fees. It’s important for consumers to do diligent research to ensure they choose the best prepaid card for their needs.
