Even before Suze Orman released her "Approved Card," John Ulzheimer, president of consumer education at SmartCredit.com, was a fierce critic of prepaid debit cards. But having a high-profile personal finance personality like Orman endorse prepaid cards as an alternative to traditional checking accounts and credit cards touched off a barrage of criticism from Ulzheimer and other consumer advocates.
If you follow this blog, you know I've been writing a lot about the fast-growing prepaid debit industry lately, researching terms for the cards and interviewing some industry leaders. I wanted to get a critic's perspective on the cards, so I spoke to Ulzheimer this week about the problems with prepaid cards why he thinks it's unlikely they'll ever be consumer-friendly enough for him to recommend.
What problems do you see with prepaid debit cards as they exist today?
A couple of things. I see a problem with, first and foremost, how they're marketed. That's one of the main problems. The way they're marketed bounces very close to deceptive and dishonest.
Most of them purport to be a less-expensive alternative to bank relationships, which is not true. You can have a checking account, savings account, debit card with a credit union and pay the sum total of $0 a month for a properly managed account. And almost every single one of these prepaid debit cards has a monthly fee, so right there, at the very least, it's already going to be more expensive.
Then you tack on the fees to load the card, assuming you want some money on it, the fees if you use the wrong ATM, the fees if you make a phone call, the fees if you want a paper statement, and all of a sudden, it's a pretty expensive way to spend your own money. So that's one of the things that irritates me is that marketing about how it's supposedly cheaper than a bank.
Another thing I don't like about them is the fact that they're marketed to people as an alternative to eventually having a relationship with a financial institution. The use of a prepaid debit card really does nothing to either prepare you credit-wise or otherwise, to having a relationship with a mainstream lender. It doesn't do anything to help your credit reports, it doesn't do anything to help your credit score despite what Suze Orman keeps telling people. It's absolutely, unequivocally not true.
Do conventional checking accounts do anything for your credit?
No, but they also don't tell people that they do.
That's certainly something she's gotten some flack over.
Well, she's certainly not listening, because she's still saying it.
I mean, a prepaid debit card is a glorified version of a giftcard that you got for Christmas. Structurally it's the same thing. It's a piece of plastic. It's issued with the brand of Visa or Mastercard or Discover or American Express. It's got a value that's loaded on the card, which is why it's called a stored-value card and you use it at whatever retailers or merchants accept that particular type of card, and it's really no different.
The only difference for these prepaid debit cards is they're somehow being positioned as if they're actually banking products, and that therefore you should have to pay a fee because we have to pay fees. Which is really kind of comical that it's being positioned that way, because I can go to the mall and buy a $500 Visa giftcard and pay $2.50 for it as a fee, and never have to pay another fee again on it.
So you don't see this as a substitute for a conventional checking account?
No way. Absolutely not.
Some of these cards are offering the ability to do direct deposit and things like that. Does that increase their utility at all?
Well it certainly helps you to avoid the $3.95 per load you're going to pay Western Union or the $4.95 per load you're going to pay MoneyGram. But you also need to be very careful that there's not a fee to direct deposit money from an employer.
And the fees (for prepaid debit) are actually normally pretty well published on the websites of the card issuer. And that's another thing that irritates me, is that they position as, "Look how transparent we are, here are all our fees." Well, you're required to disclose your fees. It's not altruism, you're required to do it.
Are the funds on prepaid debit cards FDIC insured and protected against fraud?
I don't think so, because it's not a debit card, it's a different animal altogether. A debit card is tied to a checking or savings account. It's very different, and it's actually your deposits at a financial institution are likely FDIC-insured and a debit card is essentially the connection between those funds and merchants, so it's like a plastic check.
If you lose your prepaid debit card, it's almost like you lost your gift card. Good luck trying to get it back. And, if you look at some of the fee structures, you'll notice there's a fee for a replacement card, FYI.
Another thing that kind of bothers me, and I don't know how comfortable I am saying this, because I'm not a minority, but it seems like these cards are targeted toward minorities. Russell Simmons obviously has a fantastic reputation but his audience is more of the African American audience. George Lopez, who now has a prepaid debit card, maybe the Hispanic audience. And then you have Lil' Wayne who has a prepaid Discover Card. Again I think he more so appeals to the African American community.
You don't see a whole lot of celebrity endorsed products in the financial services world like you're seeing it in the prepaid world. And people have brought up Jimmy Fallon and Alec Baldwin for Capital One. They're spokespeople. They're getting paid to go on TV and be funny for a 30-second commercial. Suze and Russel Simmons have invested in these companies that issue these cards. It's a very different dynamic.
It's branded as the Suze Orman card.
That's exactly right. It's got her picture on it. I don't think Alec Baldwin's picture is on my Capital One credit card.
I think at the end of the day, you have to be very cognizant of why you choose the financial services products you choose, and choosing it because Suze Orman yells at you to the point where you accept it, or Russell Simmons tells you that you should be using it, or you like Lil' Wayne's music -- that's not why you choose a prepaid debit card. You choose a product after you've done research on it and you determine that the usability is in line with what your usability needs are, that the fee structure is in line with what you're comfortable with, and maybe you've done some comparison shopping to make sure there aren't better options somewhere else.
Do you see this as becoming a more consumer-friendly product? Do you see any path to this being the kind of financial product you'd feel comfortable with?
I would feel more comfortable with it if more companies like American Express got into it. American Express got into the prepaid card last year and they have one fee. It's basically an ATM fee past your first one every month. So your first one's free, then subsequent ones are $2 for every ATM charge. And that's the only fee, which from a fee perspective, that's pretty reasonable because most people pay ATM fees anyway, unless they're using an in-network ATM.
So I like their option, and I like that option for a couple of reasons. A, it's really inexpensive compared to other prepaid products and the second one, which I think I like more than anything else, which is, it's actually issued by a real credit card issuer. And it's possible that you could graduate into a legitimate charge card or a legitimate credit card with the same issuer. And that's where we need to be striving, to use unsecured money on plastic, use it responsibly where the cost is nothing, except for maybe an annual fee which you can easily avoid by picking one that doesn't have an annual fee. Those are the types of products we should be using.
I know people think that credit cards are evil, but credit cards are only evil when you abuse them. Then they bite back. But proper use of a credit card and choosing the proper credit card doesn't cost you a dime.
So you're concern with the prepaid card is that they keep people on the financial fringe, so to speak?
I don't know if you know Ryan Mack. He called it a "financial subculture." It kind of locks you into this financial subculture. I don't want to steal his quote, but he's exactly right. People who depend on prepaid debit cards and always depend on them -- what happens when they want to buy a house? What happens when they want to buy a car? What happens when they want to finance a child's education? What happens when they really want to go out and get a credit card?
There's nothing in the usage of a prepaid debit card that's going to do them one bit of good when they want to enter the world of mainstream lending, and whether you like it or not, you've got to have a credit report, you've got to have a good credit score. These things are important, and prepaid debit is not the avenue to those types of things.
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