These cards have lower fees and better terms than they did a few years ago, but they do have drawbacks.
American consumers have grown increasingly fond of reloadable prepaid cards, putting about $65 billion of their money on them in 2012 — double the amount loaded in 2009. And the cards are much more user friendly and have fewer fees than when they arrived on the scene several years ago, says a new report from The Pew Charitable Trusts.
The increasing popularity of the cards is good news for consumers who want an alternative to traditional checking or credit accounts — particularly because these cards have become more affordable over the past year and, in many cases, offer lower and fewer fees than basic checking accounts.
About 12 million Americans use a prepaid card at least once a month, Pew says. The average household income of a prepaid card user is $30,000 a year.
Many of them have had or still have checking accounts and credit cards, and 2 in 5 who’ve had a checking account said they closed or lost the account because of overdraft fees.
To many users, a prepaid card is a tool to keep them from overspending.
The report said:
Most customers’ primary motivation for using prepaid cards is to gain control over their finances. The top four specific reasons they use the cards are to:
- Buy things online.
- Avoid credit card debt.
- Avoid spending more money than they have.
- Avoid overdrafts.
But these cards have some drawbacks, and people need to be aware of them. Pew says:
- They don’t come with the limited liability protection that you’d get with a checking account.
- Not all cards provide Federal Deposit Insurance Corp. protection for your funds in case the issuer goes belly up.
- “Arbitration agreements, which require a customer to settle any dispute using a private, third-party decision maker, are increasingly included in prepaid cardholder agreements,” the report says.
Have you used a reloadable prepaid card? Tell us why in the comments below or on our Facebook page.