Tax Refunds via Prepaid Debit Cards?

If you live in South Carolina, you will receive your state tax refund this year on a Bank of America issued prepaid debit card, unless you opt out to receive it via a check or direct deposit.  According to this state, the reason was to save money, which could be as much as $1 million a year in printing costs.  Bank of America was selected, because they were the lowest bidder.  Don’t feel bad for Bank of America because they’ll make a great deal of money from this deal from the fees charged to the card users.

Fees charged

To avoid paying fees, you must take out the entire refund at the first visit to a bank or credit union that accepts Visa cards; otherwise, you are charged $10 each time you visit a teller. The ATM fee is $2.50 for machines outside of Bank of America network. The first replacement card is free and after that the cost is $5 each; express delivery is $15 per request.

If you don’t live near a bank and only use ATMs, there are limitations to to the maximum withdrawal, which is usually under $1,000. In addition, you are limited to withdrawing in increments of $10 and $20 at ATMs. If you have an odd amount left, you can’t get that from an ATM.  According to Bank of America, you are not charged a transaction fee for purchases at merchants and for cash back at many grocery and convenience stores; so this is an alternative.

Government issued prepaid debit cards

Unfortunately, this isn’t the first prepaid debit card issued to consumers from the government.  Many states issue food stamps and welfare benefits on prepaid debit cards. In fact, forty-one states issue unemployment benefits via prepaid debit cards. In early 2013, the federal government will stop issuing traditional social security checks.

In trying to reduce costs of printing and mailing checks, the federal and state governments have been issuing prepaid debit cards to the so-called unbanked population. This population is lower income and is being hit with more expenses to get their money.

This does not encourage taxpayers to save their tax return, because a prepaid debit card reminds you of a gift card or credit card, not a savings account.  Another issue is the security of the cards delivered through the mail.  How do you activate them? If you need a code, how is that communicated?

If you live in South Carolina and don’t notice the opt out box on your tax return, you will receive your tax refund on a prepaid debit card.  Clearly the option should be to select that method not as the default. The winners are South Carolina and  Bank of America, not the taxpayers or the “unbanked” as this does nothing to get them “banked.”

Credit Expert Witness, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Cards, Credit Report, Credit Score, Debt, Money & Identity

This post was written by John Ulzheimer