The use of prepaid debit cards is on the rise, especially among African Americans and – perhaps surprisingly – older white men. Here’s a look at the pros and cons of using a prepaid debit card, along with an explanation of why prepaid cards are becoming more popular with blacks and others.
Pros and Cons of Prepaid Debit Cards
Prepaid debit cards work like regular debit cards, except there is no app involved. You just load up these cards with a certain amount of money, much like a gift card. You don’t incur any kind of interest charges and can even use it to withdraw money from an ATM. However, you will still have to pay maintenance fees, ATM fees, and other fees when using this type of card.
Some of the main benefits of using prepaid debit cards can include:
- Convenient alternative to carrying cash, checks or other types of debit and credit cards
- No credit check required
- Account funds are covered by FDIC insurance
- No existing bank account required, and you can purchase a prepaid card at a store to make purchases immediately
- No overdraft fees to worry about
- Limited consumer liability for loss or theft of a card, provided notice of loss is provided in a timely manner
Some of the disadvantages of using a prepaid debit card can include:
- It won’t help you build your credit history
- May charge a fee each time you use the card
- Inactivity fees and a host of other fees may apply
In case you were wondering why someone would choose to use a prepaid debit card when he or she can just get a checking account, it’s all about economy and tax habit.
The growing popularity of prepaid cards
Nine out of ten adults in America have a checking account. In comparison, only 1 in 11 adults in the United States have a prepaid card. This equates to about 23 million Americans regularly using prepaid cards, according to Pew Charitable Trusts But Pew researchers have found that prepaid cards may actually be a smart alternative to checking accounts – saving many consumers (especially young people and low-income people) money compared to overdraft checking fees and monthly service fees typically paid by people with bank accounts. .
According to Pew data, among unbanked prepaid card holders:
- 72% of them use their prepaid cards to avoid overdraft fees
- 67% use cards to avoid getting into debt; and
- 57% use prepaid cards rather than paying check cashing fees
For prepaid cardholders who do have traditional bank accounts, nearly half of them (46%) said they used the cards to avoid various fees.
This is a big part of the growing popularity of prepaid cards, which aren’t just common among unbanked people and people of color, as many people mistakenly assume.
In fact, a Pew Study 2015 found that prepaid card usage jumped more than 50% between 2012 and 2014, largely due to an increase in usage among consumers with bank accounts, many of whom bought their prepaid cards in a bank or a credit union.
Plus, these people tend to have higher incomes and are more similar demographically to the general U.S. population than unbanked prepaid card users, according to Pew’s results.
So who exactly uses prepaid cards these days?
Pew research shows that unbanked prepaid card holders are:
- More likely to be tenants
- Less likely to be married
- More likely to be unemployed
- More likely to earn less than $ 50,000 per year
- More likely to be African American
- More likely to be between 30 and 49 years old
- Less likely to have a college or postdoctoral degree
- More likely to be female
On the other hand, the holders of prepaid bank cards are:
- More likely to own
- More likely to be married
- More likely to earn $ 50,000 to $ 100,000 or more per year
- More likely to be employed
- More likely to be white
- More likely to be between 50 and 64
- More likely to have a college or postdoctoral degree
- More likely to be male
So, overall, a growing number of people – especially those with higher incomes – seem to consciously choose prepaid cards, not out of ignorance or lack of access to other financial products and services, but out of a desire to ” avoid getting into debt and reducing the amount of their expenses. the bank charges they pay.
Earlier pew research found that prepaid cards come with a lot of fees as well, including monthly service fees, ATM fees, transaction fees, and more.
But prepaid card issuers often offer customers many ways to avoid these fees. For example, using direct deposit, viewing accounts online, and loading a median $ 1,000 on prepaid cards each month were all tactics that helped consumers avoid prepaid fees.
Additionally, the Pew researchers noted that the dollar amount of prepaid debit card fees is often small compared to the higher fees typically charged when a check is bounced or a customer fails to maintain. a certain minimum current account balance.
For example, in 2012, the median service charge for prepaid debit cards was less than $ 3, Pew found. By 2015, these fees had capped at $ 15. Yet by comparison, the median overdraft fees for checking accounts were $ 35, according to Pew research.
People with prepaid debit cards also said that prepaid cards help them stay on a budget because the consumer can’t spend more than what’s loaded on the cards, Pew researchers noted.
All of this further explains the attraction of prepaid cards to many parts of the American population, including African Americans and a large portion of whites.
In light of the continued and widespread growth of prepaid cards, the Consumer Financial Protection Bureau has proposed rules to strengthen oversight of the prepaid card industry, including a plan to treat prepaid cards like credit cards.
This would go a long way in ensuring that consumers of all backgrounds – black, white and others – are treated fairly and are not subjected to unreasonable charges, regardless of which financial products they choose to use.