Back in 1999, entrepreneur Steve Streit created the first retailer-sold prepaid debit card, eventually known as Green Dot, as a way for teens to buy things online.
Prepaid cards have evolved, and today they go beyond helping people spend to assisting them in doing the opposite: budgeting and saving money. With customized budgeting features or creative incentives to save more money, prepaid debit cards make it possible to bank smart, without the bank.
Here’s how prepaid debit cards can help you:
Get your budget under control
Prepaid debit cards have a card network logo such as Visa or Mastercard, work at merchants nearly everywhere and can be loaded with funds frequently. Most don’t require a credit check. But they’re not for everyone. They mainly benefit those who want a fresh way to budget or need a replacement for a checking account.
A big advantage to most prepaid cards is the lack of overdraft programs and their associated fees traditionally found on checking accounts. A card balance is a natural spending limit — a card typically gets declined, without a fee, if there isn’t enough for a purchase or payment.
Beyond that, more prepaid debit cards have tools for creating goals or budgets than before. About 54% of the prepaid card market sampled had these tools in 2016, compared with 30% in 2014, according to research by the Center for Financial Services Innovation. The samples included 18 cards in 2014 and 22 cards in 2016, and each sample represented 90% or more of the prepaid debit card market.
Like bank accounts, many prepaid debit cards give you online and mobile access to your accounts with services including mobile check deposit and money transfers. But the more in-depth budgeting tools on some cards allow you to:
- Customize your spending limits. You can create budgets with spending categories, like entertainment and clothing.
- Visualize your purchase history. Some cards show pie charts or other graphics that categorize your spending.
- Set up email and text alerts to be notified if you spend over a certain amount.
- Use sub-accounts to manage different household costs. Designating one of your card’s sub-accounts for one type of expense, like groceries, can make it easier to put a cap on that spending.
Bluebird by American Express and Akimbo are two cards that offer four to five sub-accounts, which are linked to a master account but have separate account balances and physical cards.
These can work like a modern-day envelope system. Use one card for grocery shopping, another for dining, a third for vacations, and so on.
If you have kids, sub-accounts can allow them spending privileges with a set amount of money per card that you determine.
Beef up your savings (and maybe win money)
Budgeting is a healthy way to manage money, but you might need an incentive to keep it up.
“Budgeting for the sake of budgeting doesn’t really work,” says Thea Garon, senior manager at the Center for Financial Services Innovation. With prepaid debit cards, she adds, it’s better “when the budgeting experience is linked to the savings experience and aspirational goals.”
The Walmart MoneyCard, issued by Green Dot Bank, has budgeting features such as account alerts, but it stands out with its prize-linked savings program. Last August, Wal-Mart and Green Dot added a monthly sweepstakes to the card’s “vault.” This vault works like a savings account in that you can’t spend money from that balance without transferring it to the card’s spending balance.
Saving money in the vault gives you chances to win a prize monthly: One dollar saved equals one sweepstakes entry, and you can have up to 500 entries. Every month there are 499 winners who get $25 and one winner who takes home the jackpot, $1,000.
“Especially in a low-interest environment, the chance to win a little bit of money [is] captivating,” says Mark Matthews, senior director of Walmart Services.
But the real winning isn’t from the sweepstakes — it’s the incentive to save more, and it’s working. The average savings account balance rose over 35% from $413 to $572 from last August to December. According to Walmart, about 175,000 people had participated as of June, and usage of the Savings Vault on the MoneyCard has skyrocketed 233% over a year earlier.
“The goal here is to create a meaningful mechanism and incentive to build up a balance over time to handle emergencies,” he adds. Matthews pointed out that all savings have been manually added, since there’s no automatic savings transfer on the MoneyCard.
Prepaid cards have spiked in popularity, but …
As a banking alternative, and with more recent added features, prepaid cards have grown in popularity since Streit’s 1999 inspiration. The number of payments on prepaid debit cards increased by almost 34% from 2009 to 2012 and 5.6% from 2012 to 2015, based on the Federal Reserve Payments Study in 2016. Although growth slowed recently, the cards hold a place in millions of Americans’ wallets.
The cards are also relatively safe to use and getting safer: NerdWallet recently analyzed 44 cards across the industry, including major issuers and upstarts, and found all the cards to be insured. More federal protections on prepaid cards will go into effect in April 2018.
But that doesn’t mean prepaid debit cards are always the best choice. Here are a few reasons they might not be right for you:
- These cards don’t build credit. If you want to improve your credit, check out a secured credit card.
- It’s not the cheapest way to budget. Many cards have monthly fees — the average from a NerdWallet analysis was $4.67. Check out some of the best budgeting and savings apps here.
- Some bank accounts have better incentives to save. Some online savings accounts have interest rates north of 1% annual percentage yield. There are also new banks like Chime that reward you for saving. Your debit card purchases get rounded to the nearest dollar, and those cents automatically go to a savings account. At the end of each week, you earn a 10% bonus on all the rounded-up cents, up to $500 per year.
See alternatives and compare interest rates
- Best high-yield online savings accounts
- Best prepaid debit cards, plus two good alternatives
- How a secured credit card is different from an unsecured card