Q: Over the years, I’ve had bad luck managing my checking accounts. The “occasional” overdraft fee averaged $2,500 annually. I’ve since closed my accounts and gone with a pre-paid debit card company. These days, with banks collapsing without notice, how can I be sure of the integrity of this “new” industry and of a particular “bank” or company?
David, Las Vegas, NV
A: Can I do some truth-slaying before I get to your questions?
David, it’s not a matter of “bad luck” to have $2,500 a year in overdraft charges. That’s bad money management. Bad luck would mean, on a number of occasions, you were walking down the street and tripped, causing you to end up in an emergency room, which then kept you from depositing your paychecks.
But, what you are tripping over is not balancing your checkbook or overspending or the lack of a good budget, or all three bad moves. Even if you’ve eliminated the overdraft problem, I’m willing to bet you still have a money management problem. Fix that, and you wouldn’t have to resort to an alternative-banking situation.
Now, as to your questions.
Right now, in this economy, with insured banks going under at an alarming rate, I would be very cautious about putting my cash in an uninsured institution. As it were, the insured institutions are suffering.
Insured commercial banks and savings institutions posted a $3.7 billion net loss in the second quarter, according to data released August 27, 2009 by the Federal Deposit Insurance Corporation (FDIC). That was a decline of $8.5 billion from the $4.8 billion in profits the industry reported in the second quarter of 2008.
“The difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry’s bottom line,” said FDIC Chairman Sheila Bair.
Bair made that statement on the release of the banking financial information. Then she said: “The FDIC was created specifically for times such as these. No matter how challenging the environment, the FDIC has ample resources to continue protecting depositors, as we have for the last 75 years. No insured depositor has ever lost a penny of insured deposits…and no one ever will.”
That’s an important point and the greatest reason to put your money in an institution that is FDIC-insured.
With a prepaid debit card, your spending is limited to the amount of money loaded onto the card, which acts pretty much just like a bank- or credit union-issued debit card. If the card carries the Visa or MasterCard logo, you’ll get fraud protection, and the card will be widely accepted.
You should make sure you have deposited the funds that are stored on the prepaid debit card with an institution that is FDIC-insured. If the bank is insured, then your funds are insured up to the insurance limit, which is at least $100,000. You can check whether the institution is insured by going to the FDIC’s Web site.
If the funds are not in an insured institution, and the institution goes belly up, you have no protection. Then, you stand in line with other creditors, with just a prayer you’ll get your money.
(Photo by Roo Reynolds )