Prepaid Cards Flooding the Market

’Tis the season for whipping out the plastic. But which plastic? This holiday season, more consumers will be shopping -- and perhaps bill paying, check cashing and visiting the ATM -- with prepaid cards. Prepaids typically come with a Visa, MasterCard, American Express or Discover logo, allowing you to use the prepaid card wherever those cards are accepted, up to the amount that you’ve paid in advance. You can purchase prepaid cards in stores or online, and you can fund them over and over -- even using direct deposit to add your paycheck and, with some cards, to deposit other checks, too.

In 2009, consumers loaded $28.6 billion onto prepaid cards. By 2015, prepaids will hold $168 billion, estimates consultant Mercator Advisory Group. As fees rise on checking accounts, some consumers are firing their banks and using prepaids instead. Other consumers are subbing prepaids for credit cards to get a handle on spending, because prepaid cards generally don’t allow you to go over your preset limit.

Prepaid cards used to be considered downscale -- mostly for people with poor credit or without access to banks. But a survey conducted by banking consultant Aite Group found that a swath of mainstream consumers -- accounting for roughly 7% of U.S. households -- are opting out of the traditional banking system. Nearly one-fifth of those consumers -- many of them high-earning, well-educated Millennials -- said they were likely to switch to a prepaid card.

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Prepaid cards can be a good deal, but only if you watch out for the pitfalls. The cards come with a bevy of fees, some of which may not be disclosed or which may be disclosed in a way that makes comparison-shopping a challenge. A study by the Pew Chari­table Trusts found that most cards include between seven and 15 individual fees for discrete services, such as acquiring the card, making purchases, monthly maintenance or ATM withdrawals. The median cost for most services is less than $3.

The surprising finding from Pew is that prepaids can be cheaper than checking accounts for many consumers. ATM fees are similar for both products. Monthly fees for prepaid cards average half of what checking accounts charge. Overdraft charges are virtually nonexistent with prepaids. Customers can often avoid fees with similar strategies -- using direct deposit, favoring in-network ATMs or maintaining a minimum balance, for instance. But the savviest banking consumers -- those who make it their mission to skirt fees -- wound up spending a median of $4.50 a month on prepaid cards in the Pew study, compared with $3.99 a month on checking accounts.

The key to using prepaid cards wisely is choosing one with a suite of services and a fee structure that fit your needs. Pay no attention to distracting celebrity endorsements. Want to ditch your checking account? Look for a card that has a broad ATM network and allows direct deposit and online bill paying, says Odysseas Papadimitriou, CEO of Card Hub. The Bluebird Prepaid Card, launched in October by Wal-Mart and American Express, is a good choice (see Hits and Misses of 2012).

This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.