Every now and then I come across an article that tells an incomplete story on Prepaid Debit. The article published on CNBC.com titled "The Real Deal Behind Prepaid Cards," is yet another example of the common misunderstanding surrounding prepaid products . The article essentially picks apart the Prepaid Visa RushCard as a sub-standard option for credit challenge consumers.
The article states...
"Take the trendy-looking Prepaid Visa RushCard, the brainchild of hip-hop mogul Russell Simmons. Simmons says the product makes you “financially empowered,” and many Americans have bought in, with 1.5 million RushCards issued in the past five years. But these cards may be more financially draining than empowering – carrying costs and transaction fees that add up fast. So before you rush out to get one, know the price you’ll pay for the prepaid life."
My thoughts...
Prepaid debit products are primarily designed for consumers unable to access mainstream banking services for any number of reasons. Based on normal, every day usage, a cardholder can expect to pay $10-$15 per month in fees. For someone making a transition from cash, it is a small price to pay for the security and convenience associated with holding funds in an account. In contrast, a traditional checking account may not be the best option for a consumer just learning to manage their finances. The cost of checks and overdraft fees will dwarf the cost of a prepaid card. Additional cost benefits include the elimination of money orders and check cashing fees. A service widely used by the unbanked consumer.
The article states...
"Prepaid cards also come with extremely high fees. To get the card in the first place, you have to pay a fee of $19.95 and then for every withdrawal or transaction you make you pay $1 PLUS ATM fees associated with the bank you are withdrawing from."
My thoughts...
Unbanked or underbanked consumers spend far more using other alternative financial products and services such as check cashing, bill pay, money orders and money transfers. Additionally, you don't have to look too far outside of a normal checking account to find "extremely high fees." Consider a $30 dollar overdraft fee on a $10.00 purchase. A few of these and you're beyond extremely high fees and somewhere in the neighborhood of outrageous. Prepaid cards become a good "starter" account for a consumer in training.
The article states...
"Prepaid cards in general are marketed to those of us who still believe that everyone has the right to credit, even if you've already destroyed your own. But having credit is a privilege, not a right – and its a privilege you pay for. In some cases such as these, the price is simply too high."
My thoughts...
Prepaid cards are marketed to individuals who are traditionally unwanted by financial institutions. Or just coming out of financial hard times. Credit building is a nice feature but is probably the last thing on an unbanked consumers mind. They are looking for ways to eliminate the cost and inconvenience of having to run around cashing checks and paying bills. Some are even looking for a little dignity. Having a branded Visa or MasterCard can have a positive affect on self worth in unbanked social groups. Read my previous post for more on this subject.
The article states...
"If you're going to get a card to build credit, start instead with a secured card. A secured card is a credit card with a credit line that is built on your initial deposit – your credit is your cash –and these cards build your credit history. And if simply having the ability to plop down plastic is your goal, you're better off with a debit card."
My thoughts...
Using a prepaid card credit building feature such as the RushCard card's RushPath to Credit makes much more sense for a new or recovering credit consumer because;
- These programs do not require an initial deposit to secure a line of credit.
- Positive credit reports are made on monthly payments the consumers is already making such as rent, utility bills, etc.
- The program does not penalize the consumer for late payments. Only positive reports are made.
At the end of the day, prepaid is not for everyone. Just like BMW's are not for everyone. The slightly negative perception displayed in the article is a result of taking a product designed and package for one demographic and weighing against factors applicable to another. Unbanked and banked consumers have different needs so having access to entry level financial account services is a good thing.
The financial empowerment RushCard refers to is not just about building credit but about leveling the playing field for disenfranchised consumers. In order to play they need a ticket to the game. Prepaid account services get them in the door to mainstream banking (when most banks won't) so one day these same consumers can make the transition to traditional checking accounts, credit cards and eventually home ownership.
I'm not hating on Carmen or CNBC - I'm just dropping some science.
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