Prepaid Debit Cards: A Few Good Ones to Consider — And Several to Avoid

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Competition has helped drive down fees and increase transparency on prepaid debit cards, but new studies show that some cards still deliver little value for the cost. 

First off, though the new study from Consumer Reports is focused on prepaid debit cards, it ultimately delivers an endorsement of that old stalwart: a no-frills checking account. “Consider using a regular checking account if you can since it will come with a traditional debit card and stronger legal safeguards to protect you from losing your money from fraud or merchant mistakes” compared to prepaid debit, the study states.

For many reasons, however, traditional checking accounts aren’t appealing, or just aren’t possible, for a very large number of consumers, as the tremendous growth of the prepaid debit card market can attest. Last year, Americans used these alternative banking cards for $77 billion worth of transactions. While people today have more (and better) options options than they did in the past, all prepaid debit cards aren’t created equal, the Consumer Reports study shows.

Researchers looked at four criteria to make their assessments: how much the card costs to use, the availability of features like a large ATM network and online bill pay, whether or not funds are FDIC insured and how easy it is to find information about the card’s fees. Of the 26 cards it studied, it recommends three: the Bluebird by American Express, (when direct deposit is used), H&R Block Emerald Card and the Green Dot Visa card.

(MORE: Should You Get a Prepaid Debit Card?)

Compared to the rest of the bunch, the three “recommended” cards carry fewer fees and avoid gotchas like charging customers for basic services — like talking to a service rep or allowing cardholders to spend their own money. Bluebird, a product AmEx offers in conjunction with retail giant Wal-Mart,and H&R Block don’t charge a monthly fee, and Green Dot’s $5.95 monthly fee is waived if the user loads $1,000 or uses it 30 times for purchases or cash withdrawals each month. All have FDIC insurance on deposited funds.

A study of prepaid debit cards released earlier this month came to some similar conclusions as Consumer Reports. The site analyzed cards based on different usage scenarios, and named the Green Dot Visa and Bluebird tops for people looking for an alternative checking account, and the Kaiku Visa (a card not studied by Consumer Reports) is the best bet if you’re looking for a tool to deliver a child’s allowance. It named the Chase Liquid and PNC Smart Access cards tops if you’re looking for an alternative check-cashing tool, but it found the Green Dot Visa the most expensive for this use.

This goes to show that how a person plans to use their card makes a big difference in terms of which is the “best” card. CardHub found that the average monthly cost to use the Green Dot as a check-cashing tool was $27, more than five times as expensive as the Chase and PNC offerings.

At the bottom of the barrel on the Consumer Reports list is American Express for Target, which scored a total of 17 points out of a possible 100, followed by the Redpack Mi Promesa Prepaid MasterCard and the Reach Visa, endorsed by radio personality Tom Joyner. Perhaps that’s not surprising; CardHub found that celeb-endorsed prepaid cards generally run 17% to 36% higher than other ones.

The Target AmEx lost points because it doesn’t extend FDIC insurance to deposited funds. AmEx has been criticized for this in the past: It says that its cards are covered by state bank deposit coverage, but consumer advocates dispute the company’s claim that this provides an adequate amount of protection. AmEx extended FDIC coverage to its more popular Bluebird card in March.

(MORE: 4 Prepaid Debit Card Fees You Should Never Pay)

In customer surveys, people say a big reason for switching from a checking account to a prepaid debit card is to avoid overdrawing their account and getting socked with a big fee. And yet it’s fairly common to encounter overdraft fees with prepaid cards. A new study by the Center for Responsible Lending pointed out that overdraft fees on prepaid debit cards are especially insidious, stating, “A card whose name indicates it is ‘prepaid,’ and which many consumers use to avoid overspending, should have no credit feature at all; it is not a postpaid card.” In its study, Consumer Reports found that NetSpend cardholders can be hit with up to three $15 overdraft fees a month if they opt into the company’s “overdraft protection” plan.

In general, though, prepaid debit cards are becoming more consumer-friendly across the board, providing nearly all of the same services as bank checking accounts. Consumer Reports says in its press release accompanying the report that some prepaid cards let users “make payments electronically or by paper check, manage accounts with tools like text message alerts, and… load money onto their card by taking a photo of a check.”

(MORE: When a Retailer Asks ‘Can I Have Your Zip Code,’ Just Say No)

As the prepaid market has grown and competition has increased, fees have decreased to attract customers. In its study, CardHub found that the fees a user would incur using a prepaid card as a substitute checking account dropped by 46%, or roughly $8, in just a year — a clear indication of how fast competition in the market is expanding. And some issuers are adding perks like more convenient access to ATMs. For example, Consumer Reports noted that the RushCard now offers in-network access at Money Pass ATMs, which it didn’t do the last time the magazine looked at prepaid debit cards.

That doesn’t necessarily mean you should rush out for a RushCard — which charges a $3.95 “activation fee” and monthly fees of as much as $9.95.