Prepaid debit card use is sharply on the rise, especially among African-Americans and – perhaps surprisingly – older, White men. Here is a primer on the advantages and disadvantages of using a prepaid debit card – as well as an explanation for why prepaid cards are becoming increasingly popular with Blacks and others.

Pros and Cons of Prepaid Debit Cards

Prepaid debit cards work like regular debit cards, except there is no application involved. You simply load these cards with a certain amount of cash, much like a gift card. You won’t incur any type of interest charges and can even use it to withdraw cash from an ATM machine. However, you will still typically incur maintenance fees, ATM fees and other charges when using this type of card.

Some of the key benefits of using prepaid debit cards may include:

  • Convenient alternative to carrying cash, checks or other types of debit and credit cards
  • No credit check required
  • Account funds are covered by FDIC insurance
  • No existing bank account required, and you can purchase a prepaid card at a store to make purchases immediately
  • No overdraft charges to worry about
  • Limited consumer liability when a card is lost or stolen, as long as notice of a loss is provided in a timely manner

Some of the drawbacks of using a prepaid debit card may include:

  • It won’t help you build your credit history
  • Can impose fees every time you use the card
  • Inactivity fees and a host of other fees may apply

In case you’re wondering why anyone would choose to use a prepaid debit card when he or she can simply get a checking account, it’s a matter of economics and fiscal habits.

The Rising Popularity of Prepaid Cards

Nine out of 10 adults in America have a checking account. By comparison, only 1 in 11 adults in the U.S. possess a prepaid card. That works out to roughly 23 million Americans regularly using prepaid cards, according to Pew Charitable Trusts .But Pew researchers found that prepaid cards can actually be a smart alternative to checking accounts – saving many consumers, (especially the young and low-income), money compared to the overdraft checking fees and monthly service fees commonly paid by people with bank accounts.

According to Pew’s data, among unbanked prepaid cardholders:

  • 72% of them use their prepaid cards to avoid overdraft fees
  • 67% use the cards to stay out of debt; and
  • 57% use prepaid cards rather than pay check-cashing fees

For prepaid cardholders who do have traditional bank accounts, nearly half of them (46%) said they used the cards to avoid various fees.

This explains a big part of the rising popularity of prepaid cards, which aren’t just common among the unbanked and people of color, as many individuals mistakenly assume.

In fact, a 2015 Pew study revealed that prepaid card use jumped more than 50% between 2012 and 2014, largely due to an increase in use among consumers with bank accounts, many of whom purchased their prepaid cards at a bank or credit union.

What’s more, these individuals tend to have higher incomes and are more demographically similar to the general U.S. population than unbanked prepaid card users, Pew’s findings show.

Demographic Trends

So who exactly is using prepaid cards these days?

Pew research shows that unbanked prepaid cardholders are:

  • More likely to be renters
  • Less likely to be married
  • More likely to be unemployed
  • More likely to earn less than $50,000 annually
  • More likely to be African-American
  • More likely to be between 30 and 49 years old
  • Less likely to have a college or postgraduate degree
  • More likely to be female

By contrast, banked prepaid cardholders are:

  • More likely to be homeowners
  • More likely to be married
  • More likely to earn $50,000 to $100,000 or more annually
  • More likely to be employed
  • More likely to be White
  • More likely to be between 50 and 64 years old
  • More likely to have a college or postgraduate degree
  • More likely to be male

So overall, a growing number of people – especially higher income individuals – appear to be consciously choosing prepaid cards, not out of ignorance or lack of access to other financial products and services, but due to a desire to avoid debt and decrease the amount of bank fees they pay.

Earlier research from Pew has found that prepaid cards also have a lot of fees, including monthly service fees, ATM fees, transaction fees and more.

But prepaid card issuers often give customers lots of different ways to avoid those charges. For instance, using direct deposit, viewing accounts online, and loading a median amount of $1,000 onto prepaid cards each month were all tactics that helped consumers avoid prepaid fees.

Also, Pew researchers noted, the dollar amount of prepaid debit card fees are often small compared with the larger fees typically charged when one bounces a check or a customer fails to maintain a certain minimum checking-account balance.

For example, in 2012 the median service fee for prepaid debit cards was less than $3, Pew found. By 2015, those fees had topped out at $15. Still, by comparison, the median overdraft fee for checking accounts was $35, according to Pew research.

People with prepaid debit cards also said that prepaid cards help them stick to a budget, because the consumer can’t spend more than is loaded onto the cards, Pew researchers noted.

All of this further explains the appeal of prepaid cards for many portions of the U.S. population, including African-Americans and a large segment of Whites.

Given the continuing widespread growth of prepaid cards, the Consumer Financial Protection Bureau has proposed rules to strengthen oversight of the prepaid industry, including a plan to treating prepaid cards like credit cards.

This would go a long way toward making sure that consumers of all backgrounds – Black, Whites and others – are fairly treated and not subjected to unreasonable fees, no matter what financial products they choose to use.

Lynnette Khalfani-Cox is a personal finance expert and co-founder of the free financial advice site, Follow Lynette on Twitter @themoneycoach and on Google Plus.