Prepaid Credit Cards: Are They a Smart Tool for You?
byJul 13th 2012 10:45AM
Tens of millions of Americans with limited access to banking services turned to payday lenders and prepaid cards during tax season, much to the delight of Walmart (WMT), which offers a check-cashing service via a partnership with prepaid card specialist Green Dot (GDOT).
But now JPMorgan Chase (JPM) is pitching a new prepaid card -- Chase Liquid -- as something more than a last-ditch option for the underbanked.
"Consumers are looking for an affordable and predictable way to manage their money," said Ryan McInerney, CEO of Consumer Banking at Chase, in a press release. "Chase Liquid is a low-cost alternative to traditional checking accounts and its convenience and pricing transparency sets a new standard for prepaid products."
Thus, McInerney is saying, even if you have the option to open a checking account, a prepaid card might be a better bet for you.
Is he right? The answer is as individual as the financial situations each of us faces.
3 Big Questions to Ask
Chase isn't just dipping its toe into the prepaid card business. It's going all in by linking Liquid to its national retail and ATM network for simple reloading and cash access. That's an important point of differentiation: Traditionally, reloading prepaid cards takes effort and involves extra fees.
Checking accounts, meanwhile, aren't as free today as they were a few years ago. According to MoneyRates.com, only 34.3% of traditional checking accounts are free of fees and minimum balance requirements. A prepaid card that keeps costs low while preserving convenience might be a surprisingly smart choice for most consumers.
Still, don't shred your checkbook until you consider the answers to these three questions.
1. How much does it cost? All cards -- prepaid or no -- are only as good as the value they deliver for the price. Here's a closer look at what three of the more popular prepaid options charge right now, and what consumers can expect in return:
|Attribute||Chase Liquid||Amex PASS||Green Dot Prepaid|
|Minimum initial deposit||$25||$25||$10|
|Card purchase fee||None||None||Up to $4.95 for purchase or reload at a retail location|
|Account fees||$4.95 per month||None||$5.95 per month; waived for those who make 30 purchases or load $1,000 to the card|
|ATM withdrawal fees||None at Chase ATMs; $2.00 per at non-Chase ATMs plus host bank fees||One transaction per month free; $2.00 per thereafter||None at MoneyPass ATMs; $2.50 per transaction otherwise|
Sources: Chase, American Express, and Green Dot.
How does your checking account compare? Do you get slammed with ATM fees? What about online bill paying and debit card access? Add up the fees and cross-compare. If there are savings to be had, grab them.
2. What will your prepaid card replace? Don't think of a prepaid card as you would a debit card. They're not the same. A debit card does nothing without an account attached to it; a prepaid card is an account unto itself. So when comparing fees, think about what it is you expect the card to replace and then do a cost comparison.
Be sure to factor in your time, too. For example, if you're replacing a checking account with a card from, say, Green Dot, recognize that you may have to go to a retailer or pharmacy to reload while paying up for the privilege. Chase purports to handle these same transactions at any of its ATMs.
3. How will you use it? Don't expect a prepaid card to help you rebuild or enhance damaged credit. You're using cash so the bank isn't lending you anything, per se.
Instead, think of the card as you would a checking account but with the added benefit of setting predefined limits if you have a history of carrying credit card balances or busting the monthly budget. Call it automated discipline for the shopaholic in you.
The Future ... Coming to a Wallet Near You
Prepaid cards may taking some getting used to, but with lower fees and the added convenience of national ATM networks and online direct deposit, the days of needing paper checks, passbooks, and a checking account are slowly coming to an end. And if the numbers are to be believed, that may be a very good thing indeed.
Motley Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and past columns. The Motley Fool owns shares of JPMorgan Chase and American Express. Motley Fool newsletter services have recommended creating a bull call spread position in Walmart and writing a covered strangle position on American Express.