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Are You Protected With a Prepaid Debit Card?

Are You Protected With a Prepaid Debit Card? By Gina Ragusa
Published March 29, 2013
Credit Unions Online
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With the growing popularity of prepaid debit cards, deciding whether to commit to a checking account or stay free and loose with a prepaid card is becoming a tough decision for some consumers.

News of sneaky bank fees and lifelong checking entanglements have some consumers gun shy about opening a checking account, especially one at a big bank. In fact, the Federal Reserve reports that prepaid card transactions were up by more than 20% by 2009, making prepaid cards the fastest growing form of electronic payment at the time.

Past trends point to the use of prepaid cards continuing to rise. The Mercator Advisory Group reports that consumers loaded $57 billion onto prepaid cards in 2011, almost a 33% increase from 2010 and that card amounts increased by 44% to $82 billion in 2012.

Furthermore, Mercator prognosticates that $117 billion will be loaded onto prepaid cards by the end of 2013, heightening usage to 200% in only three years. Helping to fuel growth is a rising number of celebrity-backed cards, which has fame obsessed tongues wagging to get another piece of celebrity in their wallet.

Are Prepaid Cards Safe?

The New York Times recently discussed the Pew Charitable Trusts’ findings on whether prepaid cards provide the same level of protections delivered through a conventional checking account.

Pew pointed out that while prepaid cards may offer what is considered to be “pass through” deposit insurance, where funds are pooled in third-party, federally insured bank accounts, this backing may not offer the same protections as a checking account. When it comes to American Express prepaid, these cards operate under state “money transmitter” laws, which may vary greatly from state to state.

However, earlier this week American Express announced that its prepaid cards would be backed by the Federal Deposit Insurance Corp (FDIC). According to Dan Schulman, group president of enterprise growth at American Express the cards are meant to provide an alternative to traditional banking and that, “Technology is beginning to blur the distinction between those lines.”

Adam Rust, research director of consumer advocacy group Reinvestment Partners says that prepaid cards are still a cost effective alternative to high fee checking. “If used correctly, prepaid cards can be far more cost effective than a regular checking account, particularly if you are someone who doesn’t have the money to set aside for a minimum monthly balance.”

Why Not Consider a Credit Union Checking Account Instead of Prepaid?

Credit Unions Online discussed the matter with Steve Brown in the marketing department at Five Star Credit Union (Dothan, AL). Brown said that he understands how prepaid cards make up for a large and growing portion of the billions of dollars distributed to workers for their paycheck and how social security recipients now forced to chose between direct deposit or a prepaid card at retirement as their only options (since there are no more mailed checks).

Brown laid out his case for why going with a free checking account with a debit card is a better alternative than prepaid. “At Five Star Credit Union we counsel our members that a free checking account with a debit card is a better alternative than a prepaid debit card for several reasons:”

1) There are no fees on the use or balances on a checking account debit card as there often are on prepaid cards and no penalty for failure to spend the balance within a set time period (often 1 year to 18 months for some cards).

2) Checking accounts pay "dividends" (interest) while prepaid cards do not.

3) The debit card from a checking account can easily be "reloaded" just by depositing money into the checking account or transferring it from your savings account (which also pays dividends). Transfers can be easily and readily done in person, or via ATM, phone, online banking or mobile banking.

4) The money in your checking and savings accounts is insured by the National Credit Union Administration (NCUA) for at least $250,000 per account.

5) You can get a loan from a financial institution more easily when you have a checking and savings account with them. You can't get a loan from a prepaid debit card.

6) A lost checking account debit card can easily be replaced for free. A lost prepaid (gift) card usually is just like losing cash, so there is no safety involved in carrying the card. (There is some protection and possibility of replacement for prepaid payroll or retirement cards that utilize a PIN to access the card).

7) Checking account debit cards offer more flexibility in that you can easily deposit grandma's birthday check or your tax refund (manually or electronically) into your checking account. You can write checks and mail them or use online banking to pay bills or withdraw cash needed for tips or other required cash needs that may be more difficult to access thru a prepaid card without paying an ATM fee. Money in checking (or savings) is not "tied up" in a card if you want or need it for a non-card activity.

8) While most retail gift cards and payroll and social security cards do not cost money to obtain above their value, Visa and other credit card company cards good for use at multiple places often sell for $4 to $6 each above their face value. Checking account debit cards do not have any cost to obtain them.

Before you open a prepaid debit card, check out your local credit union and inquire about free checking with a debit card.

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