NEW YORK (MainStreet) — Prepaid debit and credit cards take their lumps from consumer advocates, and in many cases, deservedly so. The cards tend to come with high fees and high interest rates (for the prepaid credit cards).
The finance website NerdWallet estimates that the average prepaid debit card comes with $300 in "basic" fees attached for every year of ownership — and that's before activation, cancellation, paper statements and other fees kick in.
The prepaid card industry is trying to change that toxic image.
Is it time? A study from Bankrate.com shows that 26% of cards have no monthly fee and 26% will waive the monthly fee if a certain amount is loaded on the card. Altogether, 52% of the cards either have no monthly fee or will waive it, contributing to a summation that prepaid card monthly service fees, activation fees and fees for calling customer service "have declined over the past year."
"Many of the higher-fee cards seen in the past have been marginalized or even discontinued, while the newer entrants often have more transparent fee structures and in many cases, avoidable fees," says Greg McBride, Bankrate's chief financial analyst. "If you do want to supplement your finances with a prepaid debit card, it's best to assess how you plan to use it before choosing a card, so that you avoid getting hit with extra fees."
Younger Americans are particularly drawn to prepaid cards, with 33% of Millennials using reloadable prepaid cards in the past two years, compared with 25% of the general population, according to TD Bank. "Millennials quickly adapt to new tools and technologies that help them manage money more efficiently," says Tami Farrow, director of retail deposits at TD Bank. "We know from our continued research that Millennials favor debit cards and want to avoid overspending. Prepaid cards provide all the flexibility of a debit card, but with the added control of only spending what you load."
No matter what your age, when you start looking for a good prepaid-card deal you should focus on those with no or low fees. "Be careful about applying for prepaid cards," says Daraius Dubash, co-founder of Million Mile Secrets, a travel and credit cards online advisory service. "That's because a lot of them have bogus fees, like ones for not using the card, or to add money to the card."
Dubash advises choosing a card such as the American Express Bluebird, which has virtually no fees. "Plus, if you get your paycheck direct-deposited to your Bluebird account, you can withdraw money from many ATMs without a fee," he adds.
Matthew Coan, founder and head writer at the finance website Casavvy.com, says consumers who can't get a credit card should opt for secured credit cards over prepaid cards. "The main benefit with a secured credit card is that, if it is used correctly, it can help rebuild your credit score," he says. "That's something a prepaid card cannot do."
"Consequently, credit-challenged people should use the money that they plan to load onto a prepaid card and use it as a deposit for a secured credit card," he adds. "Then you're on the way to rebuilding credit and applying for the regular credit card that you want."
If you do choose a prepaid card, make sure to read the fine print thoroughly. "That really matters," says Coleen Pantalone, finance professor at the D'Amore-McKim School of Business at Northeastern University. "Every prepaid card has its own terms and fees. To compound the confusion, different card issuers may call similar fees by different names."
Pantalone notes some of the fees to watch for: "activation fees, monthly fees, replacement card fees, customer service fees and reload fees."
— Written by Brian O'Connell for MainStreet