Is It Wise To Move Your Money To A Prepaid Card?

Earlier this year, Pew Health Group released the results of focus group research about how consumers view and use prepaid cards. Key findings:

1. Consumers view prepaid cards as a way to avoid hidden bank fees
2. Consumers use prepaid cards to budget and control spending
3. Some prepaid card users like the privacy of prepaid cards, since they don't have to register with their personal information
4. Consumers dislike fees on prepaid cards
5. Prepaid card users don't want either overdraft protection, nor credit lines on prepaid cards
6. Prepaid card users want direct deposit, a savings option, and credit building tools
7. Consumers incorrectly assume federal government oversight of prepaid cards

Finding #1 and #2 together suggest that some consumers view prepaid cards as an easy way to avoid spending money you don't have and avoid the overdraft fees banks charge. For these consumers, moving their money from a checking account to prepaid cards seems attractive. But what are the "costs" or consequences of using prepaid cards instead?

Life has taught me that there are always consequences; some unintentional. Read on.

The overdraft fees banks charge have been so large and frequent, that some consumers seem conditioned to view prepaid cards as a cheaper alternative. We've all heard stories about the $35.00 cup of coffee. Nobody wants to pay that.

CNN Money reported that the average prepaid card charges $300 a year in fees. That $300 in annual prepaid fees may seem cheap if you incur overdraft fees (at $35 each) more than 9 or 10 times a year. This seems to be the case with some of the Pew focus group participants. Pew shared one participant's comments:

"I don’t like the fees on prepaid debit cards... It costs to load (them). It costs $3.95. I don’t like that I pay the $3.95... I’m good with my checking account. Nobody wants to pay extra fees. If we had to, I’d take the $3.95 any day over the $35 overdrafting or for some other fees."

If only the load fee was the only fee on prepaid cards. Both CNN Money and Consumer Reports found a wide variety of fees when it investigated prepaid cards: activation fees, monthly fees, reload fees, cash withdrawal fees, inactivity fees, online payment fees, paper statement fees, customer service phone call fees, and more.

That same $300 in annual prepaid fees seems expensive when compared to a $5 - $10 monthly checking fee many banks charge (assuming good budgeting with no overdraft fees inc urred). That $300 seems ridiculous and avoidable when compared to far lower fees or free checking available at some banks and credit unions.

Are consumers confused? Probably. Banks charge both overdraft fees and fees for overdraft protection. Wise consumers know the difference. And, to avoid overdraft fees It may be better or simpler for you to decline auto-enrollment of overdraft protection.

I found it disheartening that the focus group participants didn't seem to understand the banking practice to reorder debit purchases to maximize overdraft fees. In early 2009, this blog reported about this  banking practice, which increases the frequency of overdraft fees. The CFPB is tackling the overdraft fees issue, and seeks comments from consumers by June 29.

I find particularly troublesome finding #7 above. When deciding to use a checking account or a prepaid card, consumers need to consider:

• The fees on prepaid cards (see the above list and related articles), and which will apply given your usage
• The limits, if any, on fees and interest rates
• Prepaid cards don't build your credit history
• Your rights to receive periodic statements, disclosures of fees, error resolution process, and changes in terms
• Your liabilities when your card is lost, stolen, cloned, includes unauthorized transactions, or includes transactions in error

There are huge differences between credit cards, debit cards, and prepaid cards. There are different types of prepaid cards: gift cards, general purpose, health care spending, and payroll. This blog discussed payroll cards from Bank of America and the Walmart MoneyCard.

Wise consumers know that not all prepaid cards are the same:

• Consumer's liability (e.g., loss, theft, unauthorized transactions) is different for payroll prepaid cards versus gift/general purpose prepaid cards
• Statements and disclosure requirements are different for payroll prepaid cards versus gift/general purpose prepaid cards
• Employer-provided health care flexible spending prepaid cards often have an entirely different set of rules

To learn more and be a smart shopper:

1. Ask the retailer/bank/employer for a copy of their terms and conditions policy for the prepaid card you are considering,
2. Read that policy,
3. Read this FDIC comparison of debit cards, credit cards, and prepaid cards, and
4. Browse related articles in the "Prepaid Cards" section of this blog.

What's your opinion? Do you think it is wise to move your money from a checking account to a prepaid card?