'Tis the season for whipping out the plastic. But which plastic?
This holiday season, more consumers will be shopping -- and perhaps
bill paying, check cashing and visiting the ATM -- with prepaid
cards. Prepaids typically come with a Visa, MasterCard, American
Express or Discover logo, allowing you to use the prepaid card
wherever those cards are accepted, up to the amount that you've
paid in advance. You can purchase prepaid cards in stores or
online, and you can fund them over and over -- even using direct
deposit to add your paycheck and, with some cards, to deposit other
checks, too.
SEE ALSO:
Why I Don't Like Prepaid Cards for Kids
In 2009, consumers loaded $28.6 billion onto prepaid cards. By
2015, prepaids will hold $168 billion, estimates consultant
Mercator Advisory Group. As fees rise on checking accounts, some
consumers are firing their banks and using prepaids instead. Other
consumers are subbing prepaids for credit cards to get a handle on
spending, because prepaid cards generally don't allow you to go
over your preset limit.
Prepaid cards used to be considered downscale -- mostly for
people with poor credit or without access to banks. But a survey
conducted by banking consultant Aite Group found that a swath of
mainstream consumers -- accounting for roughly 7% of U.S.
households -- are opting out of the traditional banking system.
Nearly one-fifth of those consumers -- many of them high-earning,
well-educated Millennials -- said they were likely to switch to a
prepaid card.
Prepaid cards can be a good deal, but only if you watch out for
the pitfalls. The cards come with a bevy of fees, some of which may
not be disclosed or which may be disclosed in a way that makes
comparison-shopping a challenge. A study by the Pew
Chari�table Trusts found that most cards include between
seven and 15 individual fees for discrete services, such as
acquiring the card, making purchases, monthly maintenance or ATM
withdrawals. The median cost for most services is less than $3.
The surprising finding from Pew is that prepaids can be cheaper
than checking accounts for many consumers. ATM fees are similar for
both products. Monthly fees for prepaid cards average half of what
checking accounts charge. Overdraft charges are virtually
nonexistent with prepaids. Customers can often avoid fees with
similar strategies -- using direct deposit, favoring in-network
ATMs or maintaining a minimum balance, for instance. But the
savviest banking consumers -- those who make it their mission to
skirt fees -- wound up spending a median of $4.50 a month on
prepaid cards in the Pew study, compared with $3.99 a month on
checking accounts.
The key to using prepaid cards wisely is choosing one with a
suite of services and a fee structure that fit your needs. Pay no
attention to distracting celebrity endorsements. Want to ditch your
checking account? Look for a card that has a broad ATM network and
allows direct deposit and online bill paying, says Odysseas
Papadimitriou, CEO of Card Hub. The Bluebird Prepaid Card, launched
in October by Wal-Mart and American Express, is a good choice (see
Hits and Misses of 2012
).
This article first appeared in Kiplinger's Personal Finance
magazine. For more help with your personal finances and
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