Prepaid debit cards: The high price of convenience

By Tom Moore

Contributing Writer

Second in our Life Skills series

 

There is no doubt about it: Prepaid debit cards are everywhere. Available at most gas stations, department stores, and drug stores around the country, this is a common ad for them:  Add money any time. Pay by phone or online. No credit check. Add only what you need. Only when you need it.

A standard pack contains a plastic card, which has a number on the back to call to activate it and add money. With the same phone call, you can set up a PIN to withdraw your money at any ATM. Standard purchase price ranges from $3 to $6 dollars.

Sounds really convenient, right? Only spend what you need; don’t worry about trying to pay down those high balances on a regular credit card. It seems like a good way to budget your money, or make those online purchases on Amazon.com or Ebay.

But are these prepaid cards worth the convenience? Do they have a place in the day-to-day spending, budgeting, and finances of the average American consumer? Or are they along the same lines as Title Loans, Payday Advance Loans and appliance rental places – places whose business is built on exploiting people at their most vulnerable, when they have the most to lose?

According to estimates from the Federal Reserve Bank of Boston’s 2015 Survey of Consumer Payment Choice, about one-third of American consumers have a prepaid card of some type. Some cards are targeted to specific customer needs. For example, these cards may be used to substitute for bank accounts for people who, for whatever reason, do not qualify. Gift cards, employee incentive cards, payroll cards, and government benefit cards provide a simplified system of budgeting and money distribution.

But beware – many prepaid cards have complicated fee structures that can be difficult to understand. Fees, as well as terms and conditions, vary by card. Fees may be assessed for initial activation, monthly maintenance, ATM withdrawals, reloading, replacement, monthly statements, and more.

Fortunately, recent competition between prepaid card issuers and increased volume have helped lower card fees and simplify card terms. Unfortunately, prepaid cards are exempt from federal consumer protection laws that apply to bank debit cards. Because of this, it is wise to compare prepaid card fees and question unclear terms and conditions.

To answer the original question, the use of prepaid debit cards, as with anything in life, is simply a matter of choices and options. If you qualify for a credit card, and you can pay it off each month, then a credit card is generally your best bet, unless the interest is 18 percent or higher. However, if you do not qualify for a credit card, or if the interest rate is too high to justify using one, or if you just have to make that purchase from Amazon.com or Ebay, then some form of prepaid debit card might be a viable option. Just know that if you leave your money on your prepaid debit card, instead of taking it off in cash or purchase, you will be hit with some kind of monthly fee until there is zero balance left on the card.