Justin Bieber might be one of the most recent celebrities to endorse a prepaid debit card, but there is a long history of celebs promoting plastic in the hopes branding their names across yet another product.
Everyone -- from A-listers as equally out of touch with personal finance as the Biebs, such as the Kardashians, to money gurus like Suze Orman -- have all endorsed their own cards, and were immediately met with public backlash over the excessive prepaid debit card fees associated with them.
But I don't think prepaid debit cards deserve the bad name they've developed. Some prepaid card products are undoubtedly predatory in nature due to the exploitative fees, but there are a number of prepaid debit cards that can actually work as viable checking account alternatives, especially for the large number of people who couldn't get a checking account even if they wanted one.
The Rise of Prepaid Debit Cards
According to NBC News, 14 percent of U.S. consumers purchased prepaid debit cards in 2012, up from 12 percent the previous year. In fact, NBC cites the Consumer Financial Protection Bureau as reporting that $57 billion was put onto reloadable cards in 2012.
So if prepaid cards are so bad, why are they growing in popularity? For one: Competition. Though prepaid debit cards are exempt from rules set by the CARD act (which is why issuers can get away with charging so many fees), the growing number of cards on the market is forcing most of them to offer more competitive products.
Not to mention, there is a substantial population of bank customers whose finances and credit were severely damaged due to the most recent financial crisis and recession. Critics of prepaid cards often cite the many free checking accounts available from local banks and credit unions, but fail to recognize that some of the unbanked can't pass a credit check and therefore, can't open a checking account.
Combine all of these factors with the recent rise in checking account fees and it's easy to see why prepaid debit cards are looking so much more attractive to consumers.
Here's How Using a Prepaid Card Can Make Up for a Checking Account
- No credit check required: While many people are unable to open a checking account because they're listed in ChexSystems or TeleCheck, a prepaid debit card does not require a credit check to obtain. Those who have poor credit (or no credit) can still access the benefits of a checking account, even if they can't pass the credit requirements of banks.
- Avoid debt: Because prepaid cards are just that -- prepaid -- there's no chance cardholders can spend more money than what is preloaded to the account. It's impossible to carry a balance, and therefore, impossible to fall into debt using a prepaid debit card.
- Protection from interest charges and overdraft fees: Along those same lines, prepaid debit cardholders also avoid the expenses and fees associated with overspending via a traditional debit card or credit card. Since there is no balance to be accrued, there are no interest charges, nor is it possible to overdraw -- the card will simply be declined if there isn't enough money on it to cover a purchase.
- Online bill pay and shopping: While it's not impossible to function financially without a checking account, there are a number of modern day conveniences the unbanked are unable to enjoy. With a prepaid card, these consumers are able to enjoy the convenience offered by cards, such as paying bills and shopping online.
- Better budgeting: For anyone who struggles to curb spending or needs to set aside a specific spending budget -- such as for a teen in the household -- a prepaid card can be a great answer, with a built-in spending limit.
- Keep bank data private: Debit cards are a notoriously dangerous form of payment because they're tied directly to the bank where your accounts are held. Prepaid cards, however, are not, which helps maintain a barrier between identity thieves and your sensitive financial information.
Prepaid Debit Card Fees vs. Checking Account Fees
That's not to say, however, that prepaid debit card fees and checking account fees are comparable. By far, prepaid cards are the more expensive option.
A study by NerdWallet found the average prepaid card charges close to $300 a year in basic fees, which include charges for ATM usage and reloading funds. However, there are a multitude of additional fees commonly associated with prepaid cards, such as activation fees, transaction fees, bill payment fees -- even fees to check the account balance.
On the other hand, Time magazine reported in August 2012 that monthly checking account maintenance fees shot up to an average of $12.08, with large banks large banks specifically rising to $13.88. At the same time, the average minimum balance required to avoid maintenance fees rose by $850, now totaling close to $4,500.
A lot of people don't have $4,500 to keep sitting around in their bank. And like any other financial product, fees are just one component to be considered. There are plenty of other benefits to conducting daily transactions with a prepaid debit card.
Best Prepaid Cards With Low Fees
When it comes to prepaid debit cards, there are plenty of terrible products with excessive fees -- but also plenty of good options for consumers who aren't interested in a traditional checking account. Walmart, in particular, has hit the prepaid card market hard, offering a number of new card options with reasonable fees. For instance, the Walmart MoneyCard is a reloadable card with few fees and low minimums, while the new Bluebird by American Express and Walmart is a checking and prepaid hybrid that's also cost efficient in comparison to similar products.
Prepaid debit cards might not be the best option for people who could opt for a low-cost checking account instead -- but for those who can't, prepaid cards actually make great checking account alternatives as long as the cardholder takes the time to find the right one.