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What’s the Point of Prepaid Cards When Rewards Cards Abound?

Credit Cards
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Prepaid card image via Shutterstock

For most credit card users, the selection process can be taxing, as we filter through all the various rewards that are available for customer loyalty. We are enticed by hotel rewards, airline rewards, cold hard cash-back and other delicious possibilities. For those of us trapped in the reward mindset, we may wonder why the heck anybody would use a prepaid debit card.

Who uses prepaid cards?

The largest user population of prepaid debit cards are the underbanked and unbanked – a demographic that is almost completely opposite the regular credit card user, according to the Federal Deposit Insurance Corporation. This customer is often considered to be “nonprime,” lacking credit history or having poor credit, and thus not generally able to obtain a credit card. However, they value having the Visa or MasterCard logo on a prepaid debit card, and so attach an emotional and psychological value to having a debit card.

The prepaid debit card is also popular with the underbanked and unbanked. A 2012 FDIC survey reported that 8.2% of U.S. households are unbanked, or some 17 million adults. Twenty percent are underbanked, 29.3% do not have a savings account and 10% lack a checking account.

This demographic distrusts banks or cannot afford the fees that banks attach to checking and savings accounts. The prepaid debit card industry has exploded in growth because of this demographic, and 17.8% of the unbanked used a prepaid debit card in 2011, the FDIC reported. Prepaid debit card usage is used disproportionately by Hispanics, according to a report in HispanicRetail360.com.

Prepaid cards seen as safe haven from debt

The Pew Charitable Trusts conducted a survey on prepaid debit cards users and found a few other trends. It found that, “most have previously struggled with credit card debt, overspending, and unpredictable fees. They have turned to prepaid cards as a safe haven to avoid the risk of overdraft fees and as a commitment device, or a tool to restrict their ability to overspend or to incur interest charges. For most customers, prepaid cards are a mechanism to avoid the temptations and problems of the past.” Indeed, the survey showed that 66% of prepaid card users had a credit card. Forty-five percent have one and used it in the past year, and 21% used it more than a year ago.

To this point, the survey also revealed the four primary reasons prepaid cards are used are to buy things online, avoid credit card debt, avoid spending more money than they have, and avoid overdraft fees. Sixty-three percent reported having paid overdraft fees, 34% reported that they closed a checking account themselves because of overdraft fees, and 21% had an account closed by their bank because of these fees.

Bottom line: It’s apparent that the prepaid debit card user is a much different user than a credit card user. Forty percent of users have used other alternative financial services like payday loans or pawnshops. There’s no need to use these services if you have a credit card, so to users of prepaid debit cards, the notion of a “reward” is not even on their radar.

Prepaid card image via Shutterstock