There are a slew of new prepaid debit cards promising everything from raising your credit score to roadside assistance, but are these cards really better than an account at a financial institution? Let’s take a look at the three most common myths about using prepaid debit cards.
#1 I can’t open an account at a financial institution.
The FDIC sponsored a supplemental piece to the U.S. Census in 2009. That survey found that 9 million people, or7.7 percent of American households, do not have accounts at a credit union or bank. In the Black community that number rises to 21.7 percent.
Many people that choose to use prepaid debit cards do so because they have an account on ChexSystems and think that they are unable to open an account at a credit union or bank. There are many financial institutions that will work with you to get you back on track. These accounts are sometimes called “second chance accounts”. Of course, you could always pay the financial institution the money you owe, and have your file cleared at ChexSystems. That way you’d be able to open an account at any financial institution you like.
#2 I can avoid fees by using a prepaid debit card.
This is one of the main reasons why people are turning to prepaid debit cards. Stories in the media about banks raising fees, and in some cases creating new fees, are causing some customers to leave traditional financial institutions in search of greener pastures. More and more companies are rushing to meet this need.
Prepaid cards from Russell Simmons, Suze Orman, and American Express are available, along with scores of others, at many retail locations. Most of these cards have fees to buy the card, fees to put money on the card, fees to use ATMs, fees to make point-of-sale purchases, and sometimes there are monthly fees to keep the card open. Doesn’t sound like you’re avoiding too many fees, does it?
#3 I’m rebuilding my credit scores by using a prepaid debit card.
This is a common misconception. Prepaid debit cards act like any other debit card from a credit union or bank. It uses the money in your account to buy things that you want when you use the card. There is no way it could improve your credit scores because it’s not using any type of credit.
There are secured credit cards that can improve your credit scores, depending on which financial institution you’re working with, but secured credit cards are not prepaid debit cards. Look closely at the fine print. Just because you’re usage is being reported to a credit bureau does not mean that those reports will effect your scores.
If you choose to use a prepaid card, make sure that you understand exactly what fees will be assessed and how much those fees will be. There is a lot of misinformation floating around about prepaid debit cards.
What things, good or bad, have you heard about them?
Shay Olivarria is the most dynamic financial education speaker working today. She speaks at high schools, colleges, and companies across the country. She has written three books on personal finance, including Amazon Best Seller “Money Matters: The Get It Done in 1 Minute Workbook”. Shay has been quoted on Bankrate.com, FoxBusiness.com, and The Credit Union Times, among others. To schedule Shay to speak at your event or to download her new eBook, visit www.BiggerThanYourBlock.com.
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