At Best This Glass is Half Empty

The subject of prepaid cards came up in yesterday’s post. Evidently, these things are variously called prepaid credit cards (sort of a contradiction in terms), prepaid debit cards or secured cards. They are marketed by Walmart and the other big box stores, as well as your local grocery or drug store. They are primarily aimed at people who do not have a bank account or can not qualify for a traditional credit card. Estimates are that approximately 10% of the population does not have a bank account. In 2009, over $28 Billion were loaded into these things. It is a big business and it is growing.

On the positive side, anyone can fork over some cash, load up the card and use it to buy things on line or in other situations where cash will not work. Some of the companies that issue these cards also report their customer’s bill paying practices to the credit bureaus, allowing them to repair their credit rating.

(Just a random thought)
I don’t know if the system has any safeguards, but it seems that these cards would offer criminal enterprises an opportunity for money laundering.

Some people use these cards to avoid the overdraft protection fees associated with traditional debit cards connected to a checking account. However, as one would expect in a product designed for the financially helpless or ill informed, they are not really a bargain.

These fees include a fee to buy the card, a monthly maintenance fee, an ATM fee, a fee when the card is used to pay a bill on line, a fee for any transaction requiring a PIN number, a fee to check the balance, an inactivity fee, and a fee to load more money on the card. This last fee can be waived if the cardholder direct deposits a paycheck into the card or meets some minimum monthly deposit criteria like $1,000.

The well respected organization, Consumers Union, “reviewed 19 prepaid cards, comparing their costs using a hypothetical consumer's activity. It found costs in the first month ranged from $16.59 to use a Wal-Mart Money Card, to $17.60 for an AccountNow card, to $43.75 for a RushCard.”

Beyond the question of fees, these cards are not covered by the same Federal regulations that protect customers of banks and traditional credit cards. Since these cards can be used with direct deposit of paychecks they can trigger overdraft fees just like a debit card. With direct deposit, they can also be used for a short term payday loan, "A cash advance on a prepaid debit card has triple-digit interest rates, and is repaid by deducting the next deposit to the card all at one time, so consumers don't get an installment repayment schedule," says Jean Ann Fox, director of consumer protection with the Consumer Federation of America. Tony Soprano should get such good returns on his loans.

The bottom line? On balance, at least some of these things are probably a better option than a check cashing store or money orders, but nowhere nearly as good as a traditional bank account.

A tip of the hat to Laura Rowley, one of my favorite financial columnists, for many of the facts in this post.

And Hey! Let’s be careful out there today.