From WSJ.com and Market Watch
Reloadable prepaid cards are magic bullets to help overspenders and those who steer clear of banks. But they won’t build your credit and can cost you plenty in fees if you’re not careful.
“If you know what questions to ask and you spend some time shopping, prepaid cards can be a positive tool for managing money and can even be a substitute for a traditional checking account,” says Jennifer Tescher, chief executive of the Center for Financial Services Innovation, a consultant specializing in serving the unbanked.
Network-branded prepaid cards are peddled primarily to the roughly nine million so-called unbanked U.S. households, those, according to a 2009 Federal Reserve survey, without any checking or savings account. Another 21 million households are underbanked. Taken together, that accounts for some 60 million adults, or one-quarter of U.S. households.
Of those households, only 28% have used a prepaid card, meaning there’s plenty of untapped opportunity. Most credit-card experts expect prepaid-card use to explode beyond the 20%-plus annual growth of the past five years as banks pile on charges for debit cards and checking accounts and impose hefty minimum balances on checking accounts to waive fees.
“Prepaid cards offer a compelling value because they fill a growing void created by increasing fees for checking accounts,” says Michael Flores, chief executive of Bretton Woods, an economic research firm.
They also are gaining traction with high-school and college students whose parents fund the cards. And they have been used by the government for unemployment benefits and disaster-relief aid. Many employers also issue prepaid health cards tied to flexible health-care spending accounts, eliminating the wait and paperwork for refunds. Others deposit pay directly onto prepaid cards.
For people with bad credit or spending problems, prepaid cards allow them to operate in a plastic-ready world by using the cards to pay for airline tickets, online purchases, hotel stays and car rentals—all of which require a credit or debit card.
But don’t be fooled by promotions that offer no credit checks and promises to notify credit bureaus of your positive financial behavior. These aren’t lines of credit, so there’s no need for a credit check, and credit-rating companies don’t care how you use them, just like they don’t care how you spend cash.
Though they can be cheaper than holding a checking account or having a credit card, prepaid cards are far from free. Many are loaded with fees for gaffes like inactivity or cancellations and will charge you for balance inquiries and bill paying.
“You have to be a fine-print warrior,” says Beverly Harzog, Credit.com’s credit-card expert. “Every card is different. Some cards are more transparent about their fees while with others you have to look all over the fine print to determine all the fees.”
Plan on a start-up fee of sorts to activate and load the card. Most cards have monthly fees that can be as high as $9.95. Some will charge to transfer money from one card to another or to write checks.
Among the cheapest cards, Wal-Mart MoneyCard MasterCard, which is issued through GreenDot.com, has a $3 monthly charge. American Express’s new prepaid card doesn’t charge one at all. But you must reload the American Express card from a bank account, which makes it useless for the unbanked who will need a GreenDot MoneyPak. The MoneyPak is a means of loading cash onto the cards, much like buying an airtime card for a prepaid cellphone. Each card costs $4.95 and cannot hold more than $500, which means you have to buy a new one once the money’s gone.
American Express cards do charge you to withdraw money from an ATM, $2 after the first withdrawal each month. Wal-Mart charges $3 to reload and $2 for a cash withdrawal from an ATM and $1 for a balance inquiry. Those ATM charges are on top of the fee the owner of the ATM is charging.
Here are some tips for finding the prepaid card that works for you:
• Like everything you financially bind yourself to, read the fine print. For some of these cards, reading what’s on the website might not be enough, so read the literature that accompanies the card before you purchase it.
• Look for cards with low or zero monthly fees. There aren’t many of them, so you have to look hard.
• Get reloadable cards so you’re not paying an activation or fulfillment fee for a new card.
• Look for cards that don’t charge transaction fees or inactivity fees.
• Opt for direct deposit to fund prepaid cards. It will save you load fees and in many cases, monthly fees, not to mention a trip to a retailer.
• Don’t count on prepaid cards to help you build credit. Like checking accounts, major credit agencies don’t look at them to chart your financial behavior.
• Some cards provide overdraft coverage, similar to a checking account. But plan to pay hefty charges for it.
• Most cards will give you one to two free ATM withdrawals a month but then charge for extras.
• Many cards will allow you to get cash back from the cashier at the point of sale, which will help avert ATM fees.
• Not all cards are protected if lost or stolen, so guard them as you would cash and be wary of who you give the card number to.
Write to Jennifer Waters at firstname.lastname@example.org
—Jennifer Waters is a columnist for MarketWatch in Chicago.