Friday, February 1, 2013

Why do prepaid cards have a bad reputation?

Prepaid cards have a bad rep due to fees. People with modest incomes, such as students, seniors, or those on public assistance have very limited funds to pay for their living expenses. If one is only making about $400-$500 a month, the cards can be very costly. Depending on how you use a typical prepaid card, you could lose up to 10% of your monthly income in fees. Often they are seen as a predatory type of transaction card due to the charges they have for loading the card with money, using it at merchants or accessing cash at an ATM. All three transactions would be free at a credit union or a bank if they were using their checking account.

What would a typical month’s worth of fees look like?
I have looked up several prepaid cards over the past several weeks in researching them for use by the clients of some of our nonprofit partners in the community.  The fees I am quoting here are averages based on several typical cards.

Here is an example list of typical fees charged on a prepaid card:
Initial Purchase
Monthly Charge
Often Monthly service charges may be waived if one maintains a minimum balance or performs
several transactions to offset fee.
ATM Withdrawals-participating ATM's
(non-participating ATM's.)
There may be charges from the out of network

Teller Withdrawals
Transaction Fee (Point of Sale/PIN Purchase)
Balance Inquiry Fee
Reload cash fee

In this scenario, let’s say I bought the card, reloaded it twice during the month with my paycheck of $250. I am a student making $500 a month in a part time job. I get paid twice a month on the 1st and the 15th. I had five ATM transactions, three of which were out of the network. I used the card to make 12 purchases at various merchants. I made three inquiries at ATM’s.

Purchase price
Two reloads @ 4.95
Two In network ATM withdrawals
3 out of network withdrawals @ 2.50
Out network ATM Fees @ 3.00
12 point of sale transactions @ .15
3 ATM inquiries @ .50

Would a checking account have been cheaper?
Generally, yes. It depends on where you bank. With a checking account at most credit unions, the only fees I would have paid would have been the out of network ATM fees. Most financial institutions do not charge you to make a deposit, take money from your account with a teller, make point of sale purchases, or inquire on your account. 
But many checking accounts today have a fee unless there is a minimum monthly balance or you use direct deposit. Be sure to verify what the requirements are for your checking account before you open it

How are people confused about Prepaid cards?
People mix these up with gift cards. Gift cards typically charge a fee to purchase the card itself, but not for transacting on the card. Prepaid cards often charge for both items.

Also, people are confused by the fee schedules. There are fees for virtually anything you do with the card. Often, people think these are similar to their bank or CU ATM cards and can be used the same way. The fees eat into their balance and limit the amount of money they can use to pay for expenses.

Is a prepaid card a viable option for an unbanked person?
Yes, with caveats! If one is careful about its use. Card owners must use network ATM’s to avoid withdrawal fees. Use the internet to inquire on their balances as that is generally free with most cards. They must also keep tabs on and limit their purchases to avoid excessive point of sale transaction fees. 

How about using these for travel? 
That might be a good idea. If the card is lost or stolen, it can easily replaced and your accounts back home are not subject to identity theft. I suppose you could consider the cost of the fees part of your vacation expense!

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The next Meriwest Credit Union workshop-

Tax Changes for 2013
Speaker: Will Slade of Slade and Associates. Mr. Slade is an IRS Enrolled Agent with many years of experience in counseling his tax clients and tax preparation.
10am February 9th at the Meriwest Credit Union Main Office
5615 Chesbro Ave. San Jose CA 95123
Please RSVP with

The Mr. Slade will cover the following:
  • Tax ramifications of “Obamacare”
  • Alternative Minimum Tax (AMT) patch
  • Permanent implementation of Bush era Tax Cuts

I hope you can join us.
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