June 21, 2018
Why Prepaid Cards Are Growing & What You Need to Know
Did you know that over 50% of Americans have a prepaid credit card? That’s a huge number. So, the question is…why? How did this relatively unknown type of card see such massive growth in the last decade, and what is the best prepaid card?
In this article, we’ll look at a brief history of prepaid cards, why they have grown, the Pros and Cons to consider when opening a prepaid credit card, and our recommended best card.
- A Brief History
- Why Prepaid Cards Have Grown
- Pros & Cons
- The Best Prepaid Card <– if you are feeling anxious, you can skip to here
A brief history: Prepaid Credit Cards
Prepaid credit cards first saw use in the 1990’s. Much like today, they were designed for consumers who either did not have a bank account, did not have a sufficiently high credit score to qualify for a credit card, or both. Also known as “general purpose reloadable cards,” they work just like a bank debit card accept that money is loaded onto the card in advance. Therefore, no checking account is needed, and the card is operating more like a reloadable gift card redeemable anywhere.
Why Prepaid Cards Have Grown
Prepaid cards have been a huge benefit to a lot of people, and we’ll talk about why that is. But on the surface, one can look at a prepaid card and not understand why the growth. Most prepaid cards require you to physically load value on them at a discount store or supermarket, and because they have been fairly unregulated in the past, many have been loaded with fees.
Fees could include:
- Purchase fees
- Monthly fees
- Point-of-sale transaction fees
- ATM cash-withdrawal fees
- Balance-inquiry fees
- Fees to receive a paper statement
- ATM transaction-decline fees
- Fees to add, or “load,” funds
- Dormancy fees for not using your card
- Fees to get your remaining funds back when closing the account
- Overdraft fees
The most notorious example is the 2010 “Kardashian Kard”—which had an upfront fee $59.95 (sometimes more), a minimum fee of $1.50 for every ATM withdrawal, and a fee of $1.50 for live customer service. But even the popular GreenDot card can cost as much as $4.95 each time you reload it at a store. In our research of prepaid cards, these were big issues that we took into account. That’s why the BrightRates recommend “Best Prepaid Card” is transparent with its fees and also can be reloaded at any time, including through a mobile phone app.
But sometimes – even when not fully disclosed – consumers are ok paying a fee on a prepaid card. Why? Some don’t have an alternative. And some will gladly pay a small fee to avoid larger fees associated with a checking account.
The unbanked and underbanked
There are 68 million people in the US who do not have checking accounts. With the exception of using all cash all the time, these folks have no alternative outside of a prepaid card. This fact accounts for much of the growth that prepaid cards have seen, but coupled with this has been the “widening” of credit scores. It’s well documented that the wealthiest 1% in America has seen a disproportionately large increase in wealth over the last 20 years. This has corresponded to an increase in credit worthiness for the top earners, but a decrease in credit worthiness for the bottom 25% of earners. As credit scores decrease, prepaid cards become the only option for cashless transactions.
The Center for American Progress shows that millions of households are “unbanked” or “underbanked,” and in aggregate, it’s growing. Unbanked consists of consumers who uses no banking services whatsoever. Underbanked consists of consumers who use some banking services but not many and often alternative services like money orders or rent-to-own services. About 1/3 of unbanked consumers are below the age of 35, meaning it’s a representatively larger percentage.
In the last twenty years, the increase in the unbanked is due to a combination of banks leveraging more fees and increased immigration. In 2010, Dodd-Frank changed how banks could make money, including eliminating automatic overdraft protection enrollment which was a $32 billion per year money-maker in and of itself. Consequently, banks begun looking for fees elsewhere. For checking accounts, the minimums got higher, the qualifications got more strict, and free checking was virtually eliminated. Overdraft fees increased. The net impact was that it became risky and potentially very costly in fees for a consumer with a low account balance to operate a checking account. The average consumer now pays more than $118 a year in checking fees with those enrolled in overdraft services paying $349
But that’s not the whole story.
There’s also the increase in cashless transactions.
The rise of cashless transactions is largely a rise in consumers wanting convenience and more merchants offering cashless transactions – particularly through apps like Stripe. However, there is one huge development as it relates to prepaid cards.
On March 1, 2013, the U.S. government when “cashless.” On that date, federal payments such as Social Security, Supplemental Security Income, veterans’ benefits, and retirement stopped being made in check form. Everything went electronic. So if you needed to collect any of those benefits, you had to have some place for the government to deposit your money. Checking accounts were one such place, but a government-issued prepaid card called the Direct Express Card was the other. This essentially trained millions of consumers on the benefits of prepaid cards and how to use them. Now, virtually all government benefits with the exception of tax refunds are cashless.
This corresponds to an overall increase in the cost of depositing checks. From 1987 and 2006, the cost of cashing a paper payroll check more than doubled. The cost of cashing a Social Security check increased by 53%.
When you look at demographic shifts, increased fees associated with checking accounts, and increased cashless transactions, the growth in prepaid cards is not at all surprising. So what are the pros and cons of a prepaid card?
- No bank account needed
- No credit required – If you have a low score or no score at all, you can still open a prepaid credit card.
- FDIC insured up to $250,000 – if the bank or company that issues your prepaid card goes out of business, you don’t lose your money. The federal government backs all prepaid card deposits.
- No credit line means controlled spending
- “No credit” appears in both our pros and cons. The pro is that you can’t spend more than you have. This is good for your long-term financial state.
- It means that prepaid cards can also be an effective form of budgeting. For instance, you could have multiple prepaid cards used for different spending categories.
- Safer & more secure than carrying cash
- If you lose your prepaid card, it’s a pain, but it’s not like losing cash.
- You can call the card issuer to have the card deactivated. There is typically a fee when they issue you a new card, but again, it’s nothing like losing cash.
- Prepaid cards do not increase your credit score
- This is one of the most significant downsides but is unavoidable unless you have at least $200 to open a secured card.
- If you have the money to open a secured card, considering doing both a prepaid card and a secured card.
- No requirement to disclose fees
- In 2016, the Consumer Financial Protection Bureau (CFPB) ordered that prepaid cards come with consumer protection, but this is not scheduled to go into effect until April 2019. This will require card issuers to disclose fees.
- In the meantime, disclosure of fees is not required. Go with a card that has been recommended to you, such as our top ranked card.
- No protection from false transactions – If someone steals your number or identity and uses your card, you are probably out of the money. Unlike credit cards, you are not protected from false transactions
- No credit line means cash is needed up front
- Some cards require that you physically reload them at a store
There are many options for prepaid cards. At BrightRates, we’ve reviewed them all, including industry leaders like the American Express-Walmart Bluebird, Chase Liquid Visa, and Green Dot Prepaid Visa. Our recommendation?
Some what we like most about the the Netspend Prepaid Card:
- It can be reloaded at any time online or via a mobile app. Consumers do not need to physically go to a store location
- $0 to open the card
- $0 to reload the card (unless doing it with the help of customer service, which costs $4.95 – it’s super simple though and you shouldn’t need help)
- Purchase cushion means that if you go over a few dollars (up to $10), there is no fee. They’ll front you the money
- No minimum balance
- Government benefits can be directed to NetSpend, including:
- Social Security payments
- Pension and other regular payments
- Supplemental Security Income (SSI)
- Social Security Disability Insurance (SSDI)
- Veterans Administration Compensation and Pension
- Railroad Retirement Benefits (RRB)
- Defense Finance and Accounting Service Payments (DFAS)
- State unemployment benefits (varies by state)
- Offers more than 130,000 locations at which to reload the NetSpend card, including Western Union, MoneyGram, and many dollar stores, supermarkets, and pharmacies.