According to a 2017 survey by the FDIC, 25 percent of U.S. households are unbanked or underbanked. That means a quarter of U.S. households either don’t have a bank account, or have an account but still use financial services outside the bank to make ends meet.
Of that 25 percent, more than half said they didn’t have enough money to keep in an account. Thirty percent said they simply don’t trust banks, and a further nine percent reported that banks are not in a convenient enough location to warrant using based on where they lived.
For these unbanked individuals, basic tasks like paying bills and cashing checks can be both difficult and expensive.
Enter the prepaid card, affording happy customers the ability to pay bills online, direct deposit their checks, and pay for plastic-only services and amenities — all without the needs for a bank account.
Prepaid cards allow you to load money onto them in advance in order to make purchases or transactions. Of course, that means you can only spend as much as the amount you loaded onto it — there is no line of credit involved. So what are some of the pros and cons of using a prepaid card over a traditional credit card or even cash?
The Bank Alternative
As mentioned before, prepaid cards offer the ease of card-based purchases without the need for a bank account. They come with routing and account numbers so you can even have your paycheck deposited directly to your card. Things like shopping online, renting a car or booking a hotel room can be difficult without a traditional credit card. Thankfully, a prepaid card can fill that void, even if you don’t have a bank account.
Perks of Plastic
Generally speaking, it’s not a good idea to charge something to your credit card you’re unable to pay off in full. That’s because credit card charges accrue interest, and anything you can’t pay off in full is going to end up being even more expensive in the long run. Of course, sometimes it can’t be avoided — which is why lines of credit exist in the first place.
Borrowing money can get anyone in trouble. By using a prepaid card, you’re never borrowing. And if you’re not borrowing, then you’re not owing, and you’re not spending beyond your means. Plus, you don’t need a credit check to get a prepaid card, so you can still use plastic even if you have a poor or nonexistent credit history.
Since you can’t get into debt using a prepaid card, the approval process is easy. Prepaid cards offered by the major carriers like American Express, Visa and MasterCard often carry liability protection to help keep your money safe. Plus, the funds in these cards are almost always held by a bank or credit union, which means they benefit from federal deposit insurance.
Most prepaid cards will allow you to access money from ATMs as you need it, preventing you from having to carry around physical cash on your person. That’s not to mention the fees associated with prepaid cards are often less than what you’d pay using a check-cashing service.
Fees and Cons
While you aren’t charged interest for your purchases on a prepaid card, the biggest downside of using prepaid cards are the associated fees. Depending on the card you choose, you could be charged when you:
- Make a transaction
- Reload your balance
- Stop using the card over a certain period of time
- Withdraw cash from an ATM
- Attempt a purchase when you have an insufficient balance
Some cards even charge monthly fees. Often, these fees are predicated on how many transactions you make per month, and some carriers will waive these fees if you opt for direct-deposit on to your prepaid card.
Prepaid cards also do not report your payment history to credit bureaus, which means using a prepaid card will not help you improve your credit. They tend to have fewer billing protections than credit cards, and depending on the one you choose, can be more expensive than opening a checking account and using a debit card. You also miss out on the nice perks and awards associated with using a credit card responsibly.
There are several benefits to using prepaid cards if traditional credit cards are simply not an option for you or you don’t put faith in the banks, but you’re still looking for the ease of access plastic provides.
If you plan on giving prepaid cards a shot, do your research first on the fees associated to make sure you’re getting the card that works best for you. Read the small print before using it so you’re not spending more on fees than you need to be. Also, consider confirming that the places you frequent actually accept your card of choice before swapping.
Prepaid cards can help you avoid debt, spend within your means, and manage your income. If you struggle with credit, prepaid may just be the solution to your problems.