Prepaid debit cards can be a great alternative for those who can't open a banking account, but watch out for those fees and restrictions!
Prepaid debit cards are all the rage these days. In fact, they’re the fastest growing consumer financial products according to the Consumer Financial Protection Bureau (CFPB). And if anyone knows consumer financial products, it’s the Consumer Financial Protection Bureau. It’s half of their name!
But these prepaid debit cards aren’t always on the up and up, which is why the CFPB is instituting new rules for 2019 that prepaid debit card issuers will have to follow. But how does all of this impact you personally? How do prepaid cards work? Should you get one? How should you choose which one? And are there better options?
Read on, and learn the answers to these questions!
What are prepaid cards and how do they work?
At a basic level, prepaid debit cards provide a way for people who are not able to access regular banking services or credit cards to access some of the benefits of both. Many of these people have been flagged by Chexsystems and won’t be able to open traditional bank accounts for years to come.
While traditional checking accounts often require minimum balances, many prepaid cards offer more flexibility, allowing you to load money on the card at your discretion. And while you’ll need good credit to qualify for a credit card, many prepaid debit cards do not require any sort of credit check at all.
Prepaid debit cards allow you to use ATMs to withdraw cash, though there are likely to be some significant restrictions and fees. They also provide a secure way to store money and take part in online shopping—both of which you can’t do with cash.
Because you can’t overspend with a prepaid debit card, it can also be a good way to either keep some self-discipline in your budget or to teach teens how to manage finances.
So what’s the downside?
The downside of prepaid debit cards.
Up until recently, Consumer Reports did not recommend any prepaid credit cards. That’s because prepaid cards were loaded with fees and offered little protection if the card was lost or stolen. That was 2010.
A lot has changed since then. Now Consumer Reports evaluates different prepaid cards, some of which they’re willing to recommend. It’s important to note, however, that while prepaid cards are a lot better than they were, there are still a lot of big fees and unsafe cards out there. That’s why the CFPB is still issuing new rules.
This means you’ll want to be sure to do your research when looking for prepaid cards. Ideally, you want a card with lowest fees possible, the greatest utility possible, and the most protections in place. The closer the card is to a traditional debit card that you’d receive from a bank, the better.
Don’t just trust the card issuer, however. Look online and read customer reviews to confirm that what you’re being told is accurate, and don’t sign anything until you’ve reviewed the contract carefully. If you have friend or family member who’s a lawyer, maybe have them take a look at it too.
Some other bad credit options to consider.
If you’re having trouble finding a prepaid debit card that works for your situation, there are other similar options you might consider.
One possibility is a secured credit card. These are credit cards require cash collateral but can be accessed by people with not-so-great credit scores. The higher the cash collateral, the higher your total available credit. Unlike prepaid debit cards, many secured credit cards allow you to build up your credit score. You will have to be sure to pay off your bill each month, however, or else you could risk losing your cash deposit.
You could also consider a “second chance” bank account. These are bank accounts for customers with a financial history that bars them from opening a traditional bank account. Second chance bank accounts tend to come with additional fees and restrictions, but some of them will let you “graduate” to a regular checking account ahead of schedule. All in all, they’re definitely worth looking into.
Of course, you don’t necessarily have to pick one. Some mix of these options could work for you, though you’ll want to be careful. The more split up your money is, the easier it can be to lose track of it. And regardless of what option or options you choose, it’s vital that you track your finances and keep to a budget that you can manage.
Watch for predatory financial products.
Unfortunately, our current financial system doesn’t leave many great options for people who are already in not-so-great financial situations. Prepaid credit cards, much like bad credit loans and other products for people with not-so-great financial situations, are going to come with some downsides.
And because the creators of financial products know that those with bad credit are going to be more desperate, many will try to take advantage through predatory products.
That’s why it’s important that you always stay wary and balance all of the available options you can access to get the best results possible. Whether that’s a prepaid card or not will depend on your own situation.
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