There’s something wrong with prepaid debit cards. More so than any other financial product we’ve covered, prepaid cards rely on obfuscation and an anything-goes approach to disclosures.
But the tried-and-tested credit card disclosure method won’t work as well with prepaid: a simple list of each card’s fees leaves a consumer wondering which fees are relevant, which aren’t, and which are so ridiculous that any card charging them is a card to avoid. There’s no way to be both complete and understandable.
That’s where the nerds come in. We’re expanding our award-winning technology to include an interactive prepaid debit comparison tool, which gives consumers a tailored, at-a-glance understanding of each card’s cost. We plumbed the depths of disclosure pages to help consumers understand the financial free-for-all that is the prepaid market, simultaneously standardizing and personalizing the cards’ terms.
An at-a-glance summary of what matters
We found that a typical user could rack up almost $300 in fees on her prepaid debit card if she isn’t careful – but how can she know what to avoid before she gets slapped with penalties? How can she know beforehand whether she needs a monthly or pay-as-you-go plan, a transaction-fee-heavy or ATM-fee-heavy card, or even a prepaid debit card at all?
Our award-winning technology untangles that problem, making recommendations based on:
- Card use, including both signature and PIN transactions;
- ATM use, including withdrawals and balance inquiries;
- Reloads, including cash reloads; and
- Direct deposit and monthly loads, to determine if the user is eligible for a discount.
We also believe that checking accounts are often a better deal for consumers, but differences in fees make the two hard to compare. For example, most checking accounts let you cash checks for free, but most people won’t take the high cost of check cashing into account when choosing prepaid over traditional debit. To that end, we incorporated users’ overdraft and check cashing habits and included checking accounts in our comparison.
Comparison tools: Disclosure 2.0
Standardizing credit card disclosures greatly improved consumer welfare: at a glance, a potential cardholder can see the fees and interest rate of a card. But what if you’re dealing with not just an annual and foreign transaction fee, but a PIN transaction fee, an ATM decline fee, a cancellation fee, an inactivity fee and more?
The Schumer Box has been around for 23 years. It’s about time we took the next step forward, and made disclosures interactive. By offering a personalized estimate of each card’s cost, we help consumers to focus on what is most relevant to them. The greatest value of the Schumer Box was offering a comprehensive and succinct summary of what’s relevant in a credit card. Prepaid debit cards are so complex that a static laundry list of fees won’t accomplish that goal, but perhaps an interactive tool can.
What’s wrong with prepaid debit cards?
Let’s make one thing clear: not all prepaid debit cards are evil. Some do offer good value to people averse to joining the traditional banking system. That said, over the course of developing this tool, we’ve found out some disturbing facts:
- The average prepaid debit card costs nearly $300 a year, without direct deposit.*
- The average student-oriented prepaid debit card costs $169 a year.
- The cards charged an average of:
- $4.81 just to activate the card
- $4.56 in monthly fees
- $2 per ATM withdrawal
- $4.49 for a cash reload (for example, with a Green Dot MoneyPak)
By comparison, a Bank of America eBanking account (hardly known for its fee-less-ness) costs $107.40 a year without overdrafts, and many credit unions offer no-strings-attached free checking with opening deposits of as low as $5.
The myths and facts about prepaid debit cards
It’s not just the numbers that make us uncomfortable. There are a number of misconceptions about prepaid debit cards.
Prepaid debit is cheaper than checking. This is very rarely the case. For all the hype about free checking becoming extinct, any number of online, community bank or credit union checking accounts are completely free, with no strings attached. That’s why we include checking accounts in our database: it’s not a given that prepaid is better than traditional debit.
Prepaid debit helps your credit score. This one is simply not true. If you have bad credit, getting a prepaid debit card will have no effect whatsoever on your credit score – and you’ll be paying a high fee for the privilege. Your best bet is a secured credit card, which is accessible to those with less-than-stellar credit and which helps to rebuild credit.
Prepaid debit is as safe as traditional checking. Lately, Congress has passed a number of protections for debit and credit cards, from imposing strict regulations on overdraft fees to prohibiting arbitrary and sustained interest rate hikes. But prepaid debit cards are a relatively new innovation, and Congress has a vested interest in keeping issuers happy – they’re now paying out Social Security benefits on prepaid, for starters – so prepaid debit cards don’t have the same consumer protections.
I can’t get a checking account. Many banks and credit unions use ChexSystems to vet their checking account applicants, so someone who’s been blacklisted sees his options diminish significantly. But before choosing prepaid, check out your local credit union to see if they offer a second-chance checking account or similar program. And if you think your credit score would qualify you for a checking account but you’re still on the ChexSystems list, ING and others use a credit report rather than ChexSystems.
Prepaid debit card issuers aren’t necessarily FDIC-insured, so if the issuer goes under, your money might not be guaranteed. They also don’t get the same fraud protection that debit and credit cards do. Cards issued by banks and credit card companies generally cover fraud losses, provided that you follow through with certain procedures. It’s unclear whether those protections apply to prepaid debit cards as well, so you’re left at the dubious mercy of MasterCard and Visa’s zero-liability policies, which have pretty big loopholes. For example, you’re on the hook with a Visa prepaid card if you don’t enter your PIN or if your money is stolen via ATM.
The bottom line
Prepaid debit cards aren’t always as good as they’re made out to be. For all their slick marketing campaigns, they don’t help your credit score, they’re not as well protected as other products, and they’re often far more expensive than traditional checking. But there’s nothing inherently wrong with prepaid debit – we just think it’s a problem of misinformation. And that’s why we have our comparison tool: so that people know what they’re buying before they buy it.
*Annual cost estimates assume 10 PIN transactions, 7 signature transactions, and 2 ATM withdrawals, cash reloads and online bill payments a month. It excludes activation, balance inquiry, cancellation, inactivity and countless other fees. Usage data derived from the PULSE Network 2010 Debit Issuer Study.