In recent years, reloadable or pre-paid debit cards have gained popularity among Americans. Companies like BlueBird (Walmart and American Express) and MoneyCard (Green Dot and Walmart) have appealed to their customers with the promise of easier money management, lower fees, and no overdraft charges.
Before you jump on the pre-paid band wagon, however, we encourage you to take a closer look. There are limitations with pre-paid debit cards that only traditional checking accounts offer; as a not-for-profit financial institution, we can help you structure a checking account that suits you.
Let’s take a look.
1. What is a pre-paid debit card?
Pre-paid debit cards allow consumers to pre-load the amount of money they want available to spend onto a card and once that amount is depleted, the card no longer works until it’s reloaded. The pre-paid card is not tied to a checking account and you are not charged interest because you are not borrowing money. The appeal of these cards is clear – you can only spend what you have.
2. Do you understand the fees?
It’s often difficult to understand the fees and charges associated with pre-paid cards. Pre-paid debit card retailers earn income by charging a variety of fees that, at first glance, seem simple, low and reasonable. Take caution, however, and know that these fees can add up. Typical fees include activation fees, a monthly card fee, a reload fee and withdrawal fees. In addition to those, some issuers are charging signature-purchase transaction fees, PIN-purchase transaction fees, and even decline fees.
That’s right; the promise of not spending what you don’t have isn’t always true. If you’re not careful, you may end up spending more on fees than you would with a traditional checking account.
3. Do you want overdraft protection?
One of the benefits of the pre-paid card is the appeal of not spending money you don’t have so there isn’t a risk of overdrafts and overdraft fees. Keep in mind, however, that some issuers charge you a fee if your card is declined. Similarly, if you have an automated payment or a bill due and that payment declines, you may be charged a decline fee by the card issuer and a late fee by the retailer. That’s why many of our members appreciate the benefit of overdraft protection or courtesy pay.
However, if you don’t want your financial institution to cover items when you don’t have the money, simply tell them. At 1st United, for example, we have the option to turn off courtesy pay, which would make your checking account function similarly to a pre-paid debit card and decline debit card transactions when you have insufficient funds. If your card is declined, there is no fee charged by us.
Either way, responsible money management includes keeping track of pending transactions, automated payments, and outstanding checks.
4. Is a pre-paid debit card right for you?
As a not-for-profit financial institution, we believe that credit unions are a more consumer-friendly option. 1st United, for example, offers a checking account with no monthly fees or purchase transaction fees. Additionally, responsible management of a traditional checking account and a credit card is how you build credit and strengthen your financial health. After all, borrowing money for a car or a home will likely be a part of your future and you’ll need a credit score (the higher, the better) and a credit history.
A history of poor money management, a ChexSystems record, or bad credit, however, can preclude some consumers from being eligible for a traditional checking account. If that’s your situation, a pre-paid debit card may be a fit for you.
If you do choose to use a pre-paid debit card because you don’t qualify for a traditional checking account, be picky about the account you choose. You should select an account that reports to ChexSystems or the credit bureaus. With responsible money management, over time, you may qualify for a more affordable option with a bank or credit union.
If you have a question about your particular situation, visit one of our local branches or call us at (800) 649-0193. Or, if you need counseling on budgeting, credit repayment and more, reach out to our partner, BALANCE, for a free consultation.