According to an April 2015 survey conducted by TD Bank, a third of Americans aged 18 to 34 have used a reloadable prepaid debit card in the past two to three years, compared to a quarter of Americans overall.
But why are younger Americans opting for a financial product that was notorious for high fees? As it turns out, prepaid debit cards have turned a new leaf, and millennials, the generation born in the 1980s and 1990s, are at the forefront of a new financial movement.
Millennials have many financial hurdles to deal with, such as ballooning student loan debt, so some are finding prepaid debit cards attractive precisely because it could help keep them from digging themselves into a deeper hole. Here are some of the ways millennials may benefit from prepaid debit cards.
1. Prepaid debit cards have reduced their fees.
Many prepaid debit cards used to charge high fees to consumers. These fees included point of services fees, fees to speak to customer service and out-of-network ATM fees. Fortunately, due to consumer backlash and a market need for an alternative to credit, many prepaid debit card providers have reduced or even eliminated some of their fees.
In 2013, Pew Research found that some prepaid debit cards from larger institutions are more economical than having a checking account at the same institution.
According to the study, both checking accounts and prepaid debit cards at large institutions have mostly the same types of fees, such as paper statement fees and out-of-network ATM fees.
The primary difference between the two types of accounts is that a checking account may have overdraft fees whereas a prepaid debit card typically doesn't. Some prepaid cards have transaction decline fees, although these fees are generally much lower.
So how can this help you? If you're choosing between a prepaid debit card and a checking account and you're concerned about being vulnerable to overdraft fees, a prepaid card may be more cost-effective for you.
The important thing to note is this only refers to prepaid debit cards issued at large banks. Prepaid debit cards which aren't issued by banks may carry much higher fees.
For example, according to the study, the median monthly cost of a prepaid debit card issued by a bank can be as low as $4.95 whereas the median monthly cost of a non-bank prepaid debit card may cost as much as $6.95.
2. Prepaid debit cards may help keep your finances in check.
Prepaid debit cards can help you avoid common credit pitfalls like overspending. Because you can only spend what you load onto a prepaid debit card, you can use them to help you avoid spending more than you earn, which is a common problem people experience when using credit or when they accidentally trigger their bank's overdraft fee.
Additionally, unlike traditional credit cards, prepaid debit cards providers typically don't require a credit check. This means you avoid getting a hard inquiry on your credit report, which may negatively affect your credit score.
However, it's important to note that most prepaid debit cards won't help you build credit - they will just help you avoid overspending.
3. Your sensitive information is less likely to be stolen as a result of using a prepaid debit card.
Because most prepaid debit cards aren't linked to your checking account, you're typically not putting your bank or credit card information at risk when you purchase something.
This means you may not have to worry as much if a retailer experiences a huge security breach like Target did in 2013, when as many as 70 million customers had their personal and financial information stolen. This doesn't just benefit millennials -- it can benefit anyone who shops in stores or online.
However, keep in mind that some prepaid debit cards have fewer consumer protections from a loss or disputed charge. With credit cards or traditional debit cards, the Fair Credit Billing Act and the Electronic Fund Transfer Act may offer protection and guarantees if your card gets stolen or misused.
For instance, if someone steals your credit card or traditional debit card and goes on a shopping spree, federal law often limits your liability for the unauthorized charges. The same protections don't extend to most prepaid debit cards, so if your card is stolen and used, you may never see your money again. However, regulators have discussed increasing protection for prepaid cards.
Prepaid debit cards are attractive to millennials who are trying to avoid incurring extra fees like overdrafts and stop overspending. But when shopping for a prepaid card, beware: Prepaid debit cards with excess fees still exist. To avoid the burden of excessive fees, shop around to help find the best prepaid debit card for you.
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