Prepaid Debit Cards Get More Budget Friendly

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Have you been leery about using a prepaid debt card? Considering the rocky relationship consumers have had with these cards, it’s quite understandable. However, new cards are appearing on the market with better terms. Prepaid debit cards have seen their days of controversy, partly due to high fees, but recent reports show that some fees are declining, making this a more affordable option.

A recent Bankrate study of 31 popular prepaid cards found that all of the cards featured in the study charge a fee, but the fee structures vary greatly. For example, out of the 48% of cards that charge for activation, the fee can range anywhere from $1.88 to $9.95.

“The good news is that customer service fees are becoming less prevalent. We are seeing increased competition when it comes to monthly fees and activation fees. So we are seeing lower fees and more ways to avoid the fees. About half of the cards surveyed either don’t have a monthly service fee or they’ll waive it if you have direct deposit or a minimum deposit loaded onto the card each month,” Bankrate’s chief financial analyst, Greg McBride, told The Cheat Sheet.

Here are four takeaways about prepaid debit cards.

1. Prepaid cards can help with setting boundaries

McBride says the growth trajectory of prepaid cards is among consumers who can’t get or don’t want a checking account because of a history of overdrafts. The prepaid card sets boundaries on spending.

“A prepaid card provides the convenience of using a card without debt or overdraft,” he says. “The money that’s on the card is federally insured in the event the institution fails. You also have some of the same advantages in the event of theft or unauthorized use.”

2. Customers are getting younger

This boundary-setting feature coupled with lower fees is attracting younger customers. A 2014 study by Mercator Advisory Group shows that 2 out of 3 young adults (those between the ages of 18 and 34) purchased a prepaid card, an increase from 3 in 5 surveyed the year before. Prepaid card use is being utilized among the millennial market as a tool for money management as opposed to just a means of making up for a lack of access to banking services.   

3. Parents are giving the thumbs-up

Prepaid cards are also becoming more attractive to parents.  Some parents of teenagers see prepaid cards as a useful way to teach financial literacy. Parents can also use the cards as a convenient way to transfer money to children away at college. Among the popular offerings are Visa Buxx and Allowance Manager’s Allowance Card (which is operated through the Visa network). Kids can use these cards to make purchases, and once the funds are gone, there is no more cash to spend. This eliminates the complication of overdraft while teaching youngsters how to rein in their spending.

4. Prepaid cards emerge as a budgeting tool

According to a TD Bank survey, among survey respondents who currently use or have recently used a reloadable prepaid card, 46% say that one of the benefits is that it allows them to budget more efficiently and keep track of spending. However, prepaid cards do not allow consumers to build a banking history or earn interest. “There is also the potential for fees depending on how you use the card,” says McBride.

Despite these disadvantages, prepaid card use is on the rise. About 56% of U.S. adults bought prepaid cards in the year prior to Mercator Advisory Group’s 2014 survey, up from 53% in 2013 and 47% in 2012. Out of the 775.4 million general-purpose cards in use in 2012, roughly 159.1 million of them were prepaid cards, according to the most recent Federal Reserve Payments Study. Roughly $76.7 billion was loaded onto prepaid debit cards in 2012. Mercator expects that number to rise to $168.4 billion this year.

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