In today’s economic world cash isn’t king – plastic is! Consumers swipe credit or debit cards for just about everything, including their morning cup of coffee or their fast food lunch of burger and fries. Certain financial transactions require you to have a debit or credit card. But not everyone qualifies for a traditional bank-sponsored debit card – a card linked to an account that may be checking or savings at your local bank, – or a credit card based upon a great credit score.
Since 2008 the weak economy has created many long-term unemployed and record home foreclosures. Many people and families that had never experienced financial hardship before found themselves struggling to make timely debt payments. Individuals with prior good credit may have found themselves to be “unbankable”, as banks and card companies simply said no to any new credit for those consumers whose credit scores just went south. Additionally, some people simply have a difficult time staying out of trouble when using credit or may have left a previous bank with a pile of overdraft fees that were never paid. A new bank may not allow you to open a new account thanks to Chex Systems, a network of member financial institutions that contribute and share information on mishandled checking and savings accounts. When your financial history follows you, it is difficult to manage your finances in our plastic-based financial world of today. Enter……. prepaid cards.
Prepaid debit/credit cards are exactly that – prepaid. The user must deposit their own funds for use or withdrawal. No credit is actually extended and no bank account is necessary. Such a card allows an individual to financially operate in our world of plastic. A user can pay bills online, rent a car, easily buy airline tickets or order something on Amazon. Additionally, many card issuers allow or encourage direct deposit of a person’s paycheck into their prepaid account, (no bank account required), making it easy for an individual to have immediate access to their funds. Cards are available online or you can even purchase and “reload” them at many local stores such as CVS or Walgreen’s.
Growing in popularity, these cards have caught the attention of the Consumer Financial Protection Bureau, (CFPB). Prepaid debit cards can carry a monthly fee and a menu of other fees based upon the card owner’s number of transactions or deposits. By their nature these cards are most often used by those consumers that have little financial resources or understanding, but need a way to transact their personal finances. According to the CFPB over 7 million consumers currently use prepaid cards and the dollars loaded onto these cards is expected to grow by an average annual rate of 42% from 2010 to 2014. Last year over 57 billion had been loaded onto prepaid cards through November according to information on the CFPB website. Because prepaid cards are not subject to the same federal rules that protect consumers that use other similar types of financial products, the CFPB is considering proposing new rules surrounding these cards. The bureau is encouraging comments from consumers and you can submit your comments to the CFPB online.
The popularity of prepaid cards has grown as certain consumers have been shut out of the traditional banking system. Additionally, some people have opted to use prepaid cards to keep themselves out of financial trouble. There are many possible reasons for the use of a prepaid debit card. But, with this rapidly growing market it is important to understand the terms of a card you may be considering. As with any financial product, small fees can add up to big dollars over time. Cash may no longer be king – but it’s still your cash!
Pamela Sandy, CFP®
CONFIANCE, LLC, Financial & Investment Advisors