Prepaid debit cards are often thought of as an alternative for people who can’t qualify for traditional checking accounts, since you typically don’t have to undergo a credit check to get a prepaid card.
But most Americans who use prepaid cards also have a checking account, according to new research from the Pew Charitable Trusts, which has been studying consumer use of prepaid cards. While that might seem counterintuitive, such consumers use the cards to help manage their money and stick to a budget, said Alex Horowitz, a Pew research manager.
In a telephone survey of 613 adults who use prepaid cards at least once a month, 59 percent said they also had a checking account — and those almost always come with a debit card. The finding suggests that many people see the prepaid cards as complementing traditional bank accounts.
The cards do carry other fees, however, including monthly service fees and, sometimes, transaction fees — although those are becoming less common, according to Pew.
Consumers loaded more than $64 billion onto the cards in 2012, up from roughly $57 billion the year before. Nearly three-quarters of users are younger than 50, according to the Pew survey, conducted in late 2012.
The cards work like a debit card, but aren’t linked to a traditional checking account; you load money onto the card, and generally can’t spend more than that amount without adding more funds. If you try to buy something that costs more than the card’s balance, the purchase is usually declined, so you typically don’t have to worry about overdraft fees. You can obtain prepaid cards at drugstore and retail chains, or at some bank branches.
The cards are increasingly accessible, Pew found, and have become more affordable — in some instances, more affordable than basic checking accounts. In its initial prepaid-card study in 2012, Pew found that the cards were mostly offered by financial companies like Green Dot Corp. and the NetSpend Corp. Now, at least 10 big banks also offer prepaid cards, including JPMorgan Chase, Wells Fargo, and BB&T.
Pew also found drawbacks with prepaid cards overall. Consumer protections are scant, and the cards are largely unregulated; while most cards carry federal deposit insurance, it’s unclear in some cases when the protection applies.
Here are two questions to consider about prepaid debit cards:
Q: What fees will I incur?
A: More prepaid cards are charging monthly fees rather than per-transaction fees. Pew found that about 20 percent of the cards charged no monthly fee, while about three-fourths charged a fee ranging from less than $2 to nearly $15. A few cards waive the fee if you load a minimum amount on the card each month, or arrange for direct deposit.
Q: Are funds protected from unauthorized transactions?
A: Under the Electronic Fund Transfer Act, checking accounts must limit liability if your card is lost or stolen, but prepaid cards have no such requirement, Pew said. Many cards provide such protection voluntarily, but Pew wants it to be mandatory.