Pre-paid Cards: The Wave of the Future, or a Wave Goodbye?

And what of the lowly pre-paid debit card?

Back in my early 20s, I spent like a madcap heiress, believing that my bank balance was “negotiable” (“It’s okay,” I tried to explain once to a merchant who had a returned check of mine, “they know me there.”) and that credit cards could be paid back at my convenience. Another argument I made, from true life: “Why would I need to pay this monthly when I paid more than the minimum balance last month? Don’t you guys keep some kind of tally? I thought you were professionals!” (You know what didn’t work at getting me out of my credit card debt? That.)

Later, after a heart-to-heart with my mom (Mike’s Mom: “You want me to tell these collection callers that you’re dead?” Mike: “I haven’t worked out all the kinks yet.” Mike’s Mom: “I’d rather not lie to strangers. Maybe I should just actually kill you because I thought I raised you better than this.”), I started repairing my ravished credit through pre-paid debit cards and budgeting and my mom stopped writing “dead to me” next to my photos.

This was all in the heady days of the 1990s, though. Yet, here we are, 2011, and it’s like the whole world read my spending diary and is suffering the same consequences. Credit, which had been incredibly easy to get, and incredibly easy to exploit, is now incredibly not easy to achieve for many Americans who have burned one to many credit card issuers in the past.

The Banks’ response? Raise the fees on credit cards. Consumers’ (who aren’t credit-worthy) response? Pre-paid debit cards.

According to this Florida Sun-Sentinel article, “The prepaid card business is booming, partly because rising fees on bank accounts are prompting customers to seek alternatives.”

But it might be booming for the wrong reason. Not that I’m some sort of fiscal exemplar of responsibility, but where I used pre-paid cards to re-establish my credit rating (“Wouldn’t it be neat if your credit rating actually reached absolute zero?” my nerdy friend Adam once asked), the new trend appears to be less about establishing a solid credit record but instead a means to continue a bad-idea spending streak.

Take, for instance, from the aforementioned Sun-Sentinel article, the case of one Kimberly Elder:

“Kimberly Elder, 27 and a part-time employee at a Kmart in Hollywood, said she finds the prepaid cards so easy to use that she recently closed her bank account.”

Bad Idea #1. Oh, sure, we’d all love to get off the grid and live off the land in some sort of anarchic paradise where mattresses are banks and Kevin Costner delivers our mail. But having and keeping that bank account is one of the ways Elder would be able to establish and repair her credit. Plus, banks are where savings accounts live, too. But more on that in a second.

“Elder said Kmart now loads her pay directly onto her prepaid card.”

Bad Idea #2. Oh, Kimberly.

“She has no overdraft fees.”

O…kay — but she also now doesn’t appear to have a savings account and treats her entire paycheck as something spendable.

“And if problems arise, customer service is better with the companies that issue her cards than her former bank.”

I don’t know exactly how to respond to this (but watch me anyway!), and I certainly don’t know Ms Elder and her entire situation, but when one is at the point of closing a bank account and assigning all one’s money to a pre-paid debit card, it’s very possible — but I’m just guessing! — that Ms Elder might be the common denominator in what’s going wrong with these customer service interactions. And of course that company’s customer service team is going to treat her better: they’re guaranteed a set amount every time her paycheck is dumped into their system.

My jeremiad isn’t going to change many minds, of course. The amount customers loaded on prepaid cards jumped from $12 billion in 2008 to $42 billion last year. And 2011? Likely will top $70 billion.

Clearly, there’s a need. It’s not so clear that it’s the right need.