Consumers with RushCard prepaid debit cards found themselves unable to access their funds last week because their accounts were frozen after a payment system upgrade went awry, according to the company’s Facebook page, leaving them without means to buy necessities for their families.
“My bills are due … my son is without his meds … and we are hungry,” wrote Klyneshia Jones on RushCard’s Facebook page on Oct. 19.
Prepaid debit cards are often used by people without traditional bank accounts who generally struggle financially. Some RushCard consumers were having their paychecks or Social Security checks deposited directly into their accounts.
“I’m missing over $600,” wrote DaNae Johnson on Facebook. “I had to borrow money to make it through the weekend.”
RushCard’s founder, hip-hop magnate Russell Simmons, has apologized, saying the company is working to restore account access.
Problems with prepaid debit cards in general
RushCard’s fees are high, like some other prepaid debit cards. You can expect to pay more in monthly service charges, activation costs and transaction fees than you would with a typical credit card.
In addition to carrying higher fees, prepaid debit cards are a dead end for people seeking to build credit history. Because they don’t report your activity to the credit bureaus, they don’t improve your chances of qualifying for a loan or getting a regular credit card in the future. However, in some cases, prepaid debit cards can make good financial sense.
Alternatives to prepaid debit cards
It’s not easy to qualify for a credit card without a strong credit score, and you may not be able to get a regular checking account if you’ve had trouble with unpaid overdraft fees or account closures in the past.
But there are a couple of avenues to explore before seeking a prepaid debit card.
Second-chance bank accounts
Some financial institutions have options for people who have had trouble maintaining a checking account. These accounts, often called second-chance checking accounts, sometimes carry a monthly fee or require the accountholder to take financial literacy classes.
Secured credit cards
If you have no credit or bad credit, it can be difficult to get approved for a regular creditcard, but the requirements for secured credit cards are much more flexible.
The issuer of a secured credit card will require you to put down a deposit, similar to how you would load money onto a prepaid debit card. But unlike a prepaid debit card, secured credit cards report your activity to the credit bureaus. When used wisely, a secured card can help you build a positive credit history over time and eventually qualify for an unsecured card. These cards carry lower fees than prepaid cards.
If you really want a prepaid debit card …
We generally don’t recommend prepaid debit cards to people to people who are trying to build their credit. Secured credit cards are a much better choice for credit-building. But for people who can’t qualify for a secured card, or who can’t get a regular checking account, these cards may be the only way to have the convenience of paying with plastic. Prepaid debit cards that offer a direct deposit feature, like RushCard, give these people a way to access cash from their paychecks.
If you need a prepaid debit card, you can do better than the RushCard when it comes to fees and services. The company is trying to make amends by offering a fee holiday from Nov. 1 to Feb. 29, 2016, according to an announcement on the company Facebook page on Oct. 17. But you may be better off with a card whose lower fees will last beyond this fee break.
Other prepaid debit cards have lower fees and even cash back rewards. You might even be able to find a prepaid debit card that gives you reliable access to your money.
This article first appeared at NerdWallet.