Editorial Policy

Prepaid Cards May be a Better Deal For Inexperienced Consumers

Marcia Frellick

September 10, 2012

The warnings about prepaid cards are well-publicized — they often come with high (sometimes hidden) fees, and the cards lack uniform federal protections.

But September 2012 research by the Pew Charitable Trusts finds that , for some consumers, the cards are a better deal than having a checking account.

Here’s why: The spenders who are better off with prepaid cards are those who tend to repeatedly overdraw their checking accounts, racking up overdraft fees of $35 per offense. And while prepaid cards have many fees (most have between seven and 15 fees attached, the study found), those fees tend to be under $3 each.

Three kinds of users
Prepaid cards act like bank debit cards, but aren’t tied to a checking account. Most carry American Express, Discover, MasterCard or Visa logos, which means they can be used anywhere that cards with those logos are accepted. Consumers can spend only the amount they load onto the cards.

Pew’s study divided consumers into three levels according to banking habits and then measured how each group fared with more than 200 checking accounts offered by the 12 largest banks and more than 52 prepaid cards.

The ones better off with prepaid cards are what Pew labels “inexperienced” — those who use banking services heavily but typically have two overdrafts a month. For that group, the median cost of prepaid was $29 a month, compared with $94 for using a checking account.

The other two groups are “basic” (those who have at least one overdraft a month and have some fees) and “savvy” consumers (who avoid fees and use direct deposit).

For basic consumers, prepaid cards still have a slight advantage — the median cost of prepaid was $22, compared with $28 for a checking account.  For savvy consumers, however, the playing field almost levels. Checking accounts cost these consumers a median $4 a month; prepaid cards cost them $4.50.

Which kind of spender are you?
So where do you fall in the prepaid spectrum? Pew developed an online tool that asks questions about your banking habits. You can use it to see if prepaid cards may be a good option for you.

But the report in no way negates the persistent dangers of prepaid cards, Pew says.  Pew considers them riskier than credit cards, for example, because they’re not governed by laws that require disclosure of fees, limits on fees and notice of when fees change.

They also lack federal protections checking accounts have. Checking accounts are backed by the Federal Deposit Insurance Corp., so if a bank goes belly up, you are covered up to $250,000. But  FDIC insurance does not necessarily apply to funds loaded onto prepaid cards. Many companies that offer them aren’t banks and don’t hold the funds. Instead they pool funds in large accounts at a third-party bank, so the protections aren’t necessarily the same.

But that may be changing. The Pew report urges federal oversight of these cards, and that is likely coming. The Consumer Financial Protection Bureau (CFPB) announced in May that it is considering federal regulation.