Tag Archives: Refund Anticipation Loans

Stay Away From Prepaid Debit Cards

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On Saturday, CNN’s Your Bottom Line, highlighted the growing number of prepaid debit cards.  There were financial experts on the show that spoke to the pros and cons of using them.  A couple of the most popular prepaid debit cards include The Rush Card by Russell Simmons and more recently, The Approved Card by Suze Orman.  The primary goal of the prepaid debit card is to provide an option other than cash to the unbanked consumer.  While this may sound great in theory, there are a host of reasons why prepaid debit cards are not the best option for someone who is trying to reestablish themselves.  It’s important to keep in mind the profile of an individual that a prepaid debit card is designed for.  The following are the common characteristics:

  • They are unbanked.  In past Posts, I have mentioned the study conducted by Insight Center for Community Economic Development, which concluded that people of color are almost five times less likely than Whites to have a bank account
  • They are Low-Income.  There are many hidden fees associated with prepaid debit cards such as transaction and administrative fees; they are often called hidden fees.  For individuals that are already working hard to ‘make ends meet’, they can’t afford to pay additional fees to use their own money
  • They are more likely to apply for Refund Anticipation Loans.  These loans also charge unnecessary fees for an individual to obtain money owed to them.  For more information on refund anticipation loans, please review my Post, Avoid Tax Refund Anticipation Loans
  • Individuals are more likely to use services like rent to own, title loans, and pawn shops.  I consider all of these services as part of the ‘underground credit world’ that is used by individuals that have bad credit or no credit.  If you have made a habit of utilizing these services, I urge you to begin taking steps to restore your credit.  Please consider my book, Rags to Riches, to guide you through this process

If you are looking for ways to begin reestablishing yourself, you should know that there are banks and credit unions that are willing to work with consumers.  If you’ve had trouble with managing a bank account or credit in the past, consider performing the following steps:

  1. Visit your local credit union and consider opening a savings account.  You can request a debit card with a Visa or Mastercard logo which serves the same purpose of a prepaid debit card.
  2. Visit AnnualCreditReport.com to obtain your free credit report from the three main credit bureaus.  You can’t fix something if you don’t know it exists.  You can request your credit report from the three main bureaus for free on an annual basis
  3. Commit to staying away from the ‘underground credit world’.  These services are not designed to help you.  For instance, if you utilize rent to own services, you will pay at least twice as much for your purchases.

If you commit to the three steps above, you will find that you’ll begin to make better financial decisions.  As with anything, change takes time, but there’s no time like the present to take the first step.  Believe in yourself and move forward.

Say NO To Refund Anticipation Loans

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The process of filing one’s taxes is filled with great anticipation for some.  If you are making a beeline to your mailbox or your company’s website to obtain your W-2, you are likely in the group of taxpayers that expect a sizeable tax refund.  Additionally, there’s a high probability that you may utilize a tax preparation service and apply for a Refund Anticipation Loan (RAL).

According to the Consumer Federation of America (CFA), a RAL is a costly bank loan that is secured by a taxpayer’s expected refund, and carries an effective annual interest rate (APR) of approximately 149%.  This is almost five times worse than the default rate on most credit cards.  Believe me, I understand the desire to get your refund quickly, but you should never take out a loan to obtain money that’s owed to you.  Additionally, you should know that if the IRS reduces your refund for any reason, the entire amount of the RAL must be paid in full – hence, you will have to pay back the money out of pocket.

In the past, the IRS helped lenders minimize the chance of taxpayers receiving a RAL that would not be covered by their refund through the use of a debt indicator service.  This service was similar to a credit check; it revealed whether or not a taxpayer’s refund would be paid or used to cover government debts (e.g., taxes, outstanding child support, etc.).  In August 2010, the IRS announced that it would stop providing the debt indicator service.  While this news will not eliminate RALs, it will make them more difficult to get, and the associated fees will be even higher than they were before.

So, who are RALs targeted to?  According to the CFA, RALs are particularly targeted to low-income working families that claim the Earned Income Tax Credit (EITC).  In fact, over half of all RAL borrowers are EITC recipients – individuals that cannot afford to pay exorbitant fees to obtain their money.  Additionally, during a national survey commissioned by the CFA, it was concluded that RAL users are more likely to rent instead of own their homes; utilize high cost financial services, such as rent-to-own, payday loans and pawnshop loans; and a significant number of them are African American females. 

Given the information above, I urge you to consider doing something different this year.  There are services available to help you get your money quickly, and without the excessive fees that are associated with RALs.  Included below are quick, cost-effective methods for obtaining your tax refund:

  • On January 13, 2011, the U.S. Department of Treasury announced a pilot project to offer 600,000 low-cost, prepaid debit cards to families who may not have a bank account.  Consumers that receive the Treasury letter can quickly obtain the card to use for receiving this year’s tax refund
  • Open a savings account if you don’t have one, visit the I-CAN! E-File site (www.icanefile.org) or the IRS site (www.irs.gov), and file your taxes for FREE on your own! 
  • Visit a Volunteer Income Tax Assistance (VITA) or AARP Tax-Aide site.  They will e-File your taxes for you.  Tax-Aide sites save taxpayers money by eliminating the cost of RALs and tax preparation fees.  To find a location near you, call (1-800-906-9887) or visit www.irs.gov

Now that you know better, you should choose to make better choices. After all, why pay for something that you can get for free? As you prepare to file this year’s taxes, commit to the following:

  1. Stay away from RALs and consider utilizing one of the tax preparation services noted above
  2. Open a savings account if you don’t have one.  According to a study conducted by Insight Center for Community Economic Development, people of color are almost five times less likely than Whites to have a bank account
  3. Deposit the fees that you would have paid on a RAL into your savings account to begin your nest egg.  According to CFA, the average fees for an RAL (including tax preparation fees) are  approximately $300

Remember, small steps can lead to significant change!