Prepaid debit cards seem to be turning up all over the place. Go to your local drug store, grocer or convenience store and you'll probably see a debit card display — or two or three. There are gift cards, general-purpose cards and phone cards. Some employers issue prepaid debit cards for payroll and health care flexible spending accounts, while government agencies issue the cards for benefits such as Social Security, food assistance and disaster relief.
Celebrities are even getting into the act: Basketball great Magic Johnson, TV host Suze Orman and comedian George Lopez have all promoted prepaid debit cards.
For many people, the cards are convenient to give as gifts. But the new breed of general-use prepaid debit cards can serve another purpose: helping people manage their money and build savings outside the traditional banking system.
What is a prepaid debit card?
A prepaid debit card is like an electronic bank account, letting you pay for things without carrying cash around. Some cards can only be used in a particular store, for a limited amount of money. Other cards can be used at any place that accepts the card's payment network — such as MasterCard, Visa, Discover, or American Express — and are reloadable, so users can add money to them.
Who might want to use one?
General-use, reloadable cards can be a convenient way for unbanked and underbanked people to manage their money. The Federal Deposit Insurance Corporation estimates that about 30 million American households fall into these categories. People who want to control their spending, or rein in their kids' spending, might also find the cards useful.
The term "unbanked" typically refers to an individual, family or household without a checking or savings account. "Underbanked" refers to those who have an account but choose or need to also use alternative financial services offered by providers other than federally insured banks and credit unions. That could include check-cashing outlets, money transmitters, car-title lenders, payday loan stores, pawnshops and rent-to-own stores.
A 2010 AARP Foundation study found that minorities and people who earn less than $25,000 a year are much more likely not to have or use traditional checking and savings accounts.
Among people 45-64, African Americans were almost three times less likely and Hispanics almost two times less likely than whites to have a checking account.
African Americans and Hispanics 65+ were twice as likely as whites not to have a checking account.
People who don't have checking accounts pay on average about $1,200 a year for basic financial services like check cashing and payday loans; annual interest rates and fees for payday loans can exceed 900 percent.