- A recent Javelin study subtitled “The Rise of the Cautious Consumer” notes a decrease in credit card use, and an increase in prepaid card use.
- A survey by Cardbeat – a market research report published by Auriemma Consulting Group – found a big jump in the number of gift cards carrying a network brand, such as MasterCard or Visa.
- A MarketsandMarkets study predicts the prepaid card market will grow from $290 billion in 2009 to $791 billion by 2014.
So what’s the deal with prepaid cards? Why so popular?
1. They are available to anyone regardless of one’s credit rating. Lost your credit cards due to bad credit? If you have money to load on one of these cards, you can get one. And like other debit cards, they can be used anywhere Visa, MasterCard or Discover cards are accepted, which also makes them useful for online shopping, for example.
2. They don’t have to be tied to a bank account. That makes them helpful for someone who either doesn’t have a bank account, or doesn’t want to use a debit card tied to their account.
3. Apparently they can also be useful for money laundering, if you’re so inclined.
4. Parents may want to use a prepaid card to dole out money to kids. It may be a lot safer than giving your kids a debit card tied to your bank account.
5. They are safer than cash. Prepaid cards carry the same fraud liability protections as debit cards under Visa and MasterCard’s Zero Liability programs, though you will need to register the card.
But wait. There are drawbacks. A new study released by Consumer’s Union says that “prepaid cards can be inferior to debit cards linked to traditional bank accounts in several ways” and details problems with these cards in a 32-page report.
Here are some of the problems with prepaid cards:
1. Fees, and possibly more fees. These cards typically carry a laundry list of fees, though I did notice when I reviewed Credit.com’s prepaid card directory recently that some cards seem to carry far fewer fees than in the past. But on average, fees are more than you would pay at most banks or credit unions for a standard debit card tied to free checking.
2. No credit. They don’t help build your credit rating. These are debit cards, not credit cards, and they aren’t reported to the major credit reporting agencies. If you want to build credit, a secured card is a better bet.
3. Safety. I pointed out that these cards carry fraud protections, but they are voluntary. CU points out that these cards are not covered by the same consumer protection laws that cover debit or credit cards, and that money loaded onto these cards may not be protected by FDIC insurance.
4. Overdrafts. According to CU’s report, some cards will approve purchases even when funds are not available on the account. The consumer may then be charged a “shortage” fee of as much as $29. This is a concern, since Fed rules now prohibit debit card overdraft fees on standard debit cards unless consumers opt in.
So what do you think? Are prepaid cards hot, or not so hot?
Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Your Credit Crisis.