Are Prepaid Cards a Wise Choice?

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  • I just read about the new REACH Visa Prepaid Card that was launched this week. I’ve read a lot about the pros and cons of prepaid cards in the news and wanted to know what Mellody thinks about them. – TRUDY, Houston, TX

    There has been a lot of recent press surrounding prepaid cards. When prepaid cards first entered the market, the biggest complaint associated with them were the fees – transactions fees, inactivity fees, monthly fees, ATM fees, activations fees, customer service fees – making them a more expensive alternative than traditional banking.

    My first choice is to always use a bank account. Banking is the modern way of managing finances around the world, and I feel strongly that our community should use this option to manage their money. That said, given certain circumstances, I think there can be times in which a prepaid card makes sense.

    In your opinion, when do these cards make sense?

    Prepaid cards are generally for those individuals who are unbanked or who do not qualify for traditional bank accounts (e.g., checking and savings accounts) as a result of bad credit. Typically, these individuals are looking for an alternate way to manage their money, pay bills and do their shopping without the worry of carrying large sums of cash around with them. Also, many individuals don’t want to use payday loan places to cash their paycheck and do business.

    Additionally, prepaid cards can be a good training tool for teens – without putting your own credit at risk – teaching them about the importance of budgeting and finances since you must now co-sign for anyone under 21 who gets a credit card.

    I know you prefer banks, but do you think there are positives associated with prepaid cards?

    I do think there are positive aspects associated with prepaid cards. First, I like the consumer protections offered by some prepaid cards. For example, with the new REACH card, unauthorized transactions are protected by Visa’s zero liability charges. Therefore, if someone makes a fraudulent purchase, you would not be responsible for the charges. Additionally, some prepaid cards, like the REACH card, offer various levels of protections if a card is lost of stolen. For example, if you report a lost or stolen card within two business days, the customer’s liability is no more than $50. If the card isn’t reported within two days, the liability is limited to $500. However, if cardholders don’t notify the issuer about unauthorized charges within 60 days, they could be responsible for those charges. Beware. Not all prepaid cards offer such protections. By contrast, prepaid cards may only have voluntary protections in place that could be revised or rescinded at any time for any reason. So make sure you understand the protections that your card provides.

    Another benefit is that prepaid cards allow you to spend only what you have on the card, saving you money on expensive bank overdraft fees.

    Some cards, like the REACH card, also allow you to build credit, which is important when it comes to buying a home or a new car. PayFit Credit Builder, a built-in feature offered on a number of prepaid cards, allows you to build credit history every time you pay your bills, utilities and rent with a prepaid card. This is a positive for those individuals looking to build credit without having a credit card or other debt.

    What should you look out for?

    The point here is that all prepaid cards are not alike. Therefore, I cannot emphasize enough the importance of comparison shopping and reading the fine print if you are thinking to use a prepaid card. It is important that you understand the terms, conditions and fees before signing up with a prepaid card. For example, if you are experiencing trouble with your prepaid card, you may not think twice to call up customer service to discuss the issue. However, some prepaid cards charge for telephone customer service assistance (There is a card out there that charges $2.99 each time you call to speak with a customer service person). Additionally, many prepaid cards charge an ATM fee each time you take out cash. In addition to the card ATM fee, the bank that owns the ATM may charge an additional fee if you are not a customer of that bank. All these fees can quickly add up, eating away at your hard earned money.

    That said, there are more consumer-friendly cards on the market today with simple fee structures, making it easy to know how much you are really paying for the card. For instance, the REACH card offers a simple fee structure:

    • $9.95 activation fee
    • $8.95 monthly fee
    • $2.50 ATM Fee

    The REACH card does not charge inactivity, customer service fees or other fees previously mentioned that some prepaid cards charge.

    Also, like the REACH card, make sure the prepaid card you are considering offers FDIC protection to their cardholders. If not, you will lose your money if the bank issuing the card goes under. Prepaid card funds and cardholders qualify for FDIC coverage when the money is maintained in account(s) that meet the “pass through” requirements of the FDIC. Again, make sure you read the prepaid card terms and conditions and call the issuing bank to find out if the card offers its cardholders FDIC protection.

    Any other words of caution?

    I think individuals need to be ever more deliberate and disciplined about spending when using prepaid cards. It is critical that you stick to a budget when using your card so that you are not spending irresponsibly. For example, if you know your paycheck needs to cover transportation, groceries and utilities, it is important to only use your card for those items to avoid overspending. When using plastic instead of cash, it is easy to spend more than you intended. In fact, according to a Dun and Bradsheet study, the average person spends 12 to 18 percent more when they use plastic over cash. Lastly, beware of cash back options at the register. In order to take advantage of this feature, you have to purchase something from the store, which, again, can result in purchasing items you don’t need.

    Are there resources to help listeners compare prepaid cards?

    Yes, there are resources out there to help you compare prepaid cards. CreditCards.com and BankRate.com allows you to compare different prepaid cards on the market so that you can determine which card is best for you. Another website CreditCardGuide.com also features a tool to help you compare different prepaid cards.

    Mellody Hobson is president of Ariel Investments, a Chicago-based money management firm.

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