An increasing number of Americans are migrating out of the traditional banking and credit-card systems, where fees and policies are becoming dysfunctional and downright abusive to consumers. Moebs Services Inc., a market research firm, found that Americans were socked with $31.6 billion in overdraft and banking fees in 2011 alone.
What are consumers turning to as an alternative? The answer may surprise you, because it can be found right in your local Wal-Mart shopping center. We’re talking about pre-paid debit card programs. For some, pre-paid debit cards offer a reasonable alternative to high bank fees and invasive application processes.
Not Just for Those with Poor Credit Anymore
Consumers from all walks of life, even those in the middle to upper class, are choosing to use pre-paid debit cards like Green Dot, Rush Card, and VISA’s Upside, which offer the convenience of having plastic, without fees and privacy-invading credit checks. They even pay you a high level of interest on your deposited funds in some cases.
In fact, a recent Wall Street Journal article highlighted the shifting spending and investment habits of high earners, demonstrating this move towards pre-paid debit cards to better manage financial matters without all the hassle. Case in point, a 43-year old Microsoft Systems Analyst named Mr. Russell earning $230,000 annually has been using pre-paid debit cards to manage his earnings for a few years.
Russell advised the WSJ that, “I have no need, desire, or want to go to a regular bank.”Adding that the savings feature on the pre-paid card of his choice offered a more competitive interest rate than most banks. He no longer even has a bank account, as he dumped it due to personal irritation over fee increases and excessive overdraft penalties.
Even some of the larger investment and financial companies are jumping on board to meet the needs of the new generation of consumers; entering this hot new market with rewards-based prepaid cards for consumers.
Advantages and Disadvantages
It’s important to note that prepaid cards do incur some fees, including small monthly administrative fees, charges for loading cash using retail vouchers, and fees for receiving statements. These fees vary depending on the type of pre-paid program you chose, and many offer a wide variety of free services for consumers who take advantage of direct deposits and automatic transfers. Pre-paid cards even offer free mobile account monitoring and transaction text messages.
The advantages of using prepaid debit cards are that you do not have to worry about invasive credit checks, sneaky rate hikes, and the hassle of ordering checks and dealing with big bankers. Consumers are not limited to local financial institutions; instead they can get signed up for pre-paid programs through a variety of sources, and use the convenience of payment options at their retailers to fund accounts. Employers are familiar with pre-paid accounts and many are offering this as a payment method in lieu of payroll checks.
Pre-paid debit cards offer the flexibility of having cash on hand to pay for daily expenses while saving up for the future. Many programs offer cash-back reward sand other incentives that rival credit cards, but without the steep interest fees.
Downsides include the potential for more vulnerability to fraud, though most card issuers offer similar protections to credit cards in the event your card is stolen or incurs unauthorized debits. And although pre-paid debit accounts entail no credit checks, the government requires that issuers obtain personal information, including Social Security numbers. So they’re not as private as cash or pre-loaded gift cards.
Pre-paid debit cards are at least worth a look – if not as a substitute for a checking account, then as a supplement to it. Just be sure your account balances are backed by insurance from a financially sound institution (in many cases, balances will be covered by the FDIC, just like a bank account).