Are prepaid cards a sensible move or a lure for the chronically underbanked?
Prepaid cards come in various forms—including debit cards not tied to a bank account that carry the Visa or MasterCard logos, one-time-use gift cards and phone cards. The reloadable debit card, one of the most popular types, requires that consumers buy the card, load the dollar amount of their choice, then have purchases deducted from that balance. Over the last few years a cadre of celebs, including media mogul Russell Simmons, rapper Lil Wayne, Yankees player Alex Rodriguez, and even financial titan Suze Orman, have jumped into the market by sponsoring their own prepaid debit cards. In 2010, when the Kardashians promoted their fee-laden card to unsuspecting teens, uproar grew so loud that it led the sisters to eventually cancel their endorsement. That episode is partly why such cards are reputed to be predatory and sketchy—a way for the rich and famous to get over on the broke and credit-strained.
The fact is, misinformation abounds about what these cards can and can't offer consumers. Let's get one thing straight: A prepaid card will not rebuild your credit or improve your score. That includes even Suze Orman's The Approved Card, despite the fact that Orman recently launched a "credit project" in which her company shares information about card users' spending habits with TransUnion. (According to her Web site, that information "will not appear on your TransUnion credit report at this time." However, the card does come with one year of unlimited access to your TransUnion credit report and score.)
Before you decide to go prepaid, keep these tips in mind:
1 EVALUATE THE COSTS
Opting for a prepaid debit card usually means signing up for fees—including for enrollment and activation, maintenance, transactions and ATM withdrawals. These ongoing charges can cut into your budget, leaving you less money to pay your light bill or to purchase that cute summer dress. On the other hand a 2011 study released by Bretton Woods reports that those with traditional bank accounts often rack up more in fees per year than prepaid card users do. In some cases that's because bank account holders dip into overdraft frequently or fail to keep the minimum required balance to dodge monthly fees. "Whether you choose a prepaid debit card or a card attached to a checking account, you have to be financially disciplined," says Bill Hardekopf, CEO of lowcards.com. "If you are frugal and responsible and avoid bouncing checks or overdrawing your account, then the traditional bank debit card is still usually the cheaper alternative."
2 GET THE BEST DEAL
If you do choose the prepaid debit card, says financial expert Glinda Bridgforth, you can avoid some fees by purchasing your card online (rather than through a retailer), having a portion of your paycheck or all of it directly deposited onto your card (to avoid the reload fee that some card issuers charge), using the card frequently enough (fees may apply if you don't meet the company's minimum number of swipes), or withdrawing cash only from a card's in-network ATM. "Because the cards are all so different," says Bridgforth, author of Girl, Get Your Credit Straight! (Broadway), "it's imperative that you shop around, understand what is being offered and make a customized decision for yourself." If you're a small-business owner with irregular income, for example, then you may not use the direct deposit feature on a card; thus, you'll likely incur a reloading fee.
3 STUDY THE FINE PRINT
While most government benefit cards and payroll cards—prepaid debit cards that are reloaded with your paycheck—are subject to all federal consumer protection laws, reloadable prepaid debit cards have no guarantee against unauthorized transactions. That means you can lose whatever balance you have left on the card. However, the cards do come with consumer protection provided by the brands. "The zero-liability policies of the card brands—Visa, MasterCard, Discover, American Express—are more protective of a prepaid card holder than the federal regulations," says attorney Terry Maher, general counsel for the Network Branded Prepaid Card Association. He adds that prepaid debit cards allow charge-backs (which come into play if there's a dispute over goods and services purchased) and provide protection if your card is lost or stolen. But if a gift card is lost or stolen, its user won't receive any protection against the loss.
4 BE STRATEGIC
"You might decide to give your college kid a prepaid card for his or her books or expenses," says Hardekopf. "That puts a limit on what your child can spend." Bridgforth adds that prepaid cards can also be used to curb one's spendaholic tendencies. "Some people can't handle having a lot of cash on hand, because just seeing that money in a wallet or bank account tempts them to spend impulsively."
5 USE MULTIPLE CARDS
You needn't view prepaid debit cards and traditional debit or credit cards as mutually exclusive: You may have a debit card associated with a checking account, yet you may also choose to set aside money for a vacation or other major purchase on a prepaid card. "The appeal of a prepaid card is that once the money is gone, it's gone—you can't overspend," says Hardekopf.
6 OPT FOR A TEMPORARY MONEY FIX
If your finances are in flux—bills are overdue, late fees are adding up, and creditors are calling—it can be difficult to manage a checking account properly. This situation may lead to overdraft fees as high as $35 a pop. The best solution might be a Band-Aid in the form of a carefully chosen prepaid debit card that you use only during an economically volatile time. As you stabilize your cash flow, you can slowly work your way back to the responsible use of a checking account or credit card. Just be sure that if you decide to get a prepaid debit card, choose the one that will cost you the least in fees, given your unique financial circumstances.
7 CONSTANTLY UPDATE YOUR FINANCIAL PORTFOLIO
Selecting one method of managing your finances and sticking with it indefinitely is a mistake. Continually reevaluate your situation and decide which option is right for you based on what's happening today—and what you're planning for tomorrow.
8 SEEK OUT RESOURCES
Certified financial planner D. Crystal Alford-Cooper, president of the Association of African American Financial Advisors, says resources are popping up all over the country that can help consumers manage a less-than-perfect financial history, reducing the need for prepaid cards. Says Alford-Cooper: "There's a program called Bank on DC [in Washington, D.C.] that gives people with poor credit histories a second chance to open up a checking account." She encourages consumers to seek out similar programs in their cities and states.
9 CONSIDER AN ALTERNATIVE
Are you looking to build or restore your credit history? Do you want to make a big-ticket purchase—one that might require a bank loan—in the next few years? If so, a secured credit card that requires you to put down a specified amount of cash as collateral may be a better option than a prepaid debit card. Though you will fork over an annual fee and pay interest on your monthly unpaid balance, you'll also be building a credit profile with a secured card, because how you manage the account will be reported to the big three bureaus (Equifax, TransUnion and Experian). Whatever your choice, there's no one-size-fits-all approach to how you should handle your cash. But there's a single rule that will ensure you hang on to the maximum of what you work so hard to earn: Evaluate all your options before signing on the dotted line.
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