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The Unfortunate Trend Toward Prepaid Debit Cards

Posted: 09/14/10 05:29 PM ET

A recent report by Javelin Strategy & Research is making the rounds, showing that consumers are moving away from credit cards as a payment method, and are relying more and more on debit cards. As Mainstreet.com reports, the recession has made American consumers more cautious about taking on debt (and rightfully so!), so that even those consumers who have the money to spend are relying less on credit and shifting to debit.

I think this is great. While I obviously have a special place in my heart for credit card rewards, I also feel that our overzealous misuse of credit is part of what got us into this mess. So it's good to see Americans becoming more responsible with credit cards, or at the very least avoiding hanging themselves with them.

However, one part of this report that worries me is that consumers are not only using more traditional debit cards, they are also relying more on their vicious twin cousin, the prepaid debit card.

What's wrong with prepaid debit cards?

One of the main reasons that people give up credit cards is because it is actually quite expensive to spend money that you don't have. Interest rates could run anywhere from 12-25%, and if you're not careful you'll also end up hemorrhaging fees. The harder off you are, the more ways banks find to make money off of you, so the more incentive you have to use a debit card and avoid the headaches.

But if that's the case, then prepaid debit cards are usually not the best way to go. What you would save in interest charges, you'll just end up paying in other miscellaneous fees. As someone who reads a ton of terms and conditions, I can tell you that the laundry list of fees associated with almost all prepaid debit cards makes credit card companies look generous. Since products like these are typically geared towards users with few other credit options, these card companies are able to charge an arm and a leg for their services, and that's exactly what we do.

To give you an idea, here's a typical prepaid debit card fee structure:

  • $9.95 one-time activation fee
  • $3.95 monthly maintenance fee
  • $1.95 ATM withdrawal fee
  • $0.95 ATM balance inquiry fee
  • $3.95 replacement card fee
  • $0.95 fee per customer service call, but the first 2 per month are free
  • $2.95 paper statement fee

And the list goes on. Funny thing is, this is one of the better prepaid debit cards, the Wired Plastic Visa. So those looking to pry themselves from the menacing jaws of credit card companies could just end up in a different trap with a card like this.

What other options do I have?

My advice to those making the switch would be to open a free checking account at your local bank or credit union, and get a traditional debit card. They function in almost the exact same way -- you deposit money in your checking account, and when you swipe the card it comes out -- except that even checking accounts at the most evil of banks rarely involve the types of fees I describe above. Plus it won't cost you anything to withdraw money or check your balance at your bank's ATMs.

You may even want to consider checking out Perkstreet.com. They offer a traditional debit card that even pays you 2% cash back rewards. No matter what, do what you can to avoid getting stung by fees!

 

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