Prepaid cards are increasingly growing in popularity among people with higher incomes and the newer generation.
The cards, which initially were viewed as an alternative to checking accounts for people who have been locked out of the traditional banking system, are now also being used by millennials worried about overspending, parents looking for an easy way to send cash to children in college and anyone who has been burned by overdraft fees, studies show.
About one in four Americans use or have used a prepaid card in the past two or three years, according to a survey of 1,300 consumers by TD Bank. That jumps up to 33 percent for people between ages 18 and 34.
Use of prepaid cards was more common among people with higher incomes, the study found. Some 40 percent of the people who said they’d used the cards made between $50,000 and $100,000 and 21 percent made more than $100,000. “There is a misperception about how the cards are being used,” said Tami Farrow, a senior vice president with TD Bank, which launched a prepaid card last month.
Many of the people who haven’t used prepaid cards yet said they were open to the idea. Sixty percent of millennials said they would consider using one, compared to 49 percent of respondents overall. Some consumers use the cards in addition to, and not instead of, a traditional checking account, Farrow said.
As the cards become more popular, consumer advocates are keeping a closer eye on the fees charged. The Consumer Financial Protection Bureau is developing new rules that would standardize the disclosure process and add other protections. Issuers are also working to make the cards more consumer friendly by reducing fees and improving disclosure.
Because the types of fees charged by each card can vary, people should look for a card that matches their financial habits, says Greg McBride, chief financial analyst for Bankrate.com. “It’s very important to assess how you plan to use the card before you choose the card,” he says. “You don’t want to get tripped up on fees.”
Comparing fees for prepaid cards is more complicated than it can be for someone comparing checking accounts, McBride says. That’s because the fees charged will vary, and issuers set different exemptions.
Here are some of the most common fees:
Monthly service fees. About 26 percent of the 31 prepaid cards studied by Bankrate.com don’t charge a monthly fee, up from 17 percent last year. Another 26 percent of the cards will waive the fee for customers who meet certain requirements. For instance, some cards will clear the fees, which can range from $1 to $9.95, for customers using direct deposit or who link the card to a checking account at that bank.
Activation fee. Close to half of the cards studied charge an activation fee of up to $9.95, but 13 percent do not charge the fee if the card is bought online.
Inactivity fees. Sixteen percent of cards charge $1.95 to $5.95 in inactivity fees if accounts are dormant for several months in a row. Anyone who isn’t going to use the card regularly should steer clear of the issuers that charge this fee.
ATM fees. About 71 percent of prepaid cards are linked with ATM networks, according to the Bankrate study. Of those, 68 percent don’t charge fees for withdrawals from ATMs that are in network. The remaining 32 percent will charge $1 to $2.50 per withdrawal, according to the study.
What’s more, 81 percent of cards charge to check your balance at an ATM — $.50 to $3, up from 77 percent last year. Someone who plans to use a prepaid card frequently to withdraw cash from an ATM should choose a card that doesn’t charge fees for it, McBride says.
Overdraft fees. These fees are rare with prepaid cards, because 94 percent of cards do not allow for overdraft, according to Bankrate.com. The few cards that do will charge $15 to $34 per overdraft.