Oh how the prepaid card market has changed. A few years ago, the words "prepaid card" likely conjured up pictures of those international calling cards that hang by the register in many convenience stores. Now, the images swirling through your head could very well be of Magic Johnson hooping, Suze Orman shrieking financial advice, and Lil' Wayne rapping. Demand for prepaid cards (not to mention big-name celebrities to endorse them) has increased dramatically since the cap on debit card swipe fees was implemented in October 2011. Unfortunately, with so many of us shopping for our first prepaid card and new offers regularly hitting the market, choosing the right one can be difficult. The trick is knowing what to look for.
You see, prepaid cards are known for often charging a multitude of small fees, which means the wrong card can cost you around $300 per year. Identifying the way you intend on using your card allows you to focus on minimizing the fees that will come into play most often and ensure that your card has the features you need. It therefore pays to check out the following breakdown of the main roles that prepaid cards play in people's financial lives and the specific offers that best suit each, according to Card Hub's 2012 Prepaid Cards Report.
Role 1: Alternative Checking Account. When it became less profitable for big banks to offer debit cards to banking customers, they cut debit card rewards and raised checking account fees. Many consumers responded by replacing the traditional combination of a checking account and debit card with a prepaid card. The move makes a lot of sense in light of the fact that you can find prepaid cards with all the features you'd want in a checking account/debit card, except a physical checkbook.
Since this particular application requires a prepaid card that can completely replace, rather than supplement, a checking account/debit card (it would be redundant to use both), you need one that allows you to directly deposit monthly paychecks, offers an online bill pay feature so that you can pay companies that do not accept plastic, is accompanied by a national ATM network, and charges low fees for activation, monthly maintenance, in-network ATM withdrawals, and purchases.
Best Card: GreenDot Prepaid Card. This card does not charge a monthly fee when you load at least $1,000 per month. You can load your monthly paycheck onto the card via direct deposit, pay monthly bills using the online bill pay feature, and withdraw cash for free from GreenDot's nationwide network of more than 22,000 ATMs.
Role 2: Financial Literacy Teaching Tool. The Great Recession served as a wake-up call to the shockingly low level of financial literacy in the U.S. Not only do 42 percent of people grade their knowledge at a C-level or below, according to the National Foundation for Credit Counseling, but the 2012 Global Financial Literacy Barometer also showed that over 70 percent of parents believe their kids don't know the money-management basics. While state and federal financial literacy programs are indeed growing, parents know that learning must also take place outside of the classroom. A prepaid card can be a great introduction for a young person, as it can give them practical experience using plastic, budgeting, and strategically avoiding fees without the threat of incurring credit score damage or overdrawing their account.
Parents obviously need a way to load money onto their children's accounts, so cards that accept deposits from a bank account or using PayPal are a must. They must also offer a nationwide network of ATMs and charge minimal fees for activation, monthly maintenance, in-network ATM withdrawals, and purchases. You don't want your child's allowance to be consumed by fees.
Best Card: Kaiku Prepaid Card. While this card does charge a $1.95 monthly fee, ATM withdrawals at AllPoint's 43,000 ATM locations nationwide are free. There aren't any purchase fees or customer service fees either, so kids can access their allowances and ask questions free of charge.
Role 3: Alternative Check Cashing Tool. Roughly 8 percent of households in the U.S. are classified as "unbanked" by the Federal Deposit Insurance Corporation (FDIC), meaning they do not have a checking or savings account. These people tend to cash their monthly paychecks at local cash checking stores, which can be quite expensive. A prepaid card that allows you to load funds with a check and inexpensively access your money, either by making a purchase or an ATM withdrawal, is therefore quite useful. It stands to lower costs and provides the access to plastic that one needs to buy things online, book hotel rooms, rent cars, etc.
Best Card: Chase Liquid Card. While this card has a $4.95 monthly fee, cardholders can deposit as many checks as they want at no additional charge by visiting either a branch or ATM or by simply using their smartphones. They can also easily access their money at ATMs or by using their cards to make purchases directly at no extra charge. That means people used to frequenting check cashing stores no longer have to do so and can save a lot of money in the process.
Now, these offers won't remain the best in their respective classes forever, but armed with the knowledge of what to look for in a prepaid card, you should have no trouble choosing one in the future. That's a very good thing too, because while a one might not fit your needs at the moment, prepaid cards aren't just a fad; they're here to stay.
Odysseas Papadimitriou is the CEO of the credit card comparison website Card Hub and the personal finance social network Wallet Hub.
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