Consumer Comeback Blog

When a Prepaid Debit Card Does and Doesn’t Make Sense

Written by Jeffrey Trull

 prepaid-debit-cardInterest in prepaid debit cards is increasing rapidly. According to CardHub.com, consumers loaded $57 billion onto prepaid cards in 2011 for an increase of about 33% from 2010.

These prepaid cards make sense for a variety of uses, from an alternative to a checking account to giving kids an allowance.

While prepaid debit cards can be a useful part of your financial toolbox, they’re not the best choice in all situations. Here’s when you should say “yes” or “no” to prepaid debit cards.

Yes: Can’t get a regular credit or debit card

Getting a prepaid debit card is easy since there’s no application or credit requirements to get one. You simply sign up and load money on, making this a simple option for those who aren’t able to get a credit card or debit card.

No: Trying to build credit

Currently, no prepaid debit cards help you build credit. Why? These debit cards aren’t tied to your credit at all.

Think of prepaid cards as more like a gift card rather than like a credit card. Since it’s prepaid, you must load the card with money first and then you spend from there. There are typically no bills to pay, although there are often fees related to use of the card.

If you are looking to build credit, look to a regular credit card first, or apply for a secured credit card as a second option.

Yes: Avoiding Cash

If you don’t want to carry around large amounts of cash, prepaid debit is a good alternative. You can take advantage of the many benefits that regular debit cards have over cash, like avoiding ATM fees and easier tracking of your spending. Prepaid debit cards can come in handy when using cash isn’t an option, like with online purchases.

No: Saving on fees

One major downside to prepaid debit cards is that they often come with many fees. While credit card accounts are often free to open and typically only charge fees when you violate certain terms, you’ll likely have to pay fees regularly with prepaid debit cards.

Some common fees for prepaid debit cards include:

  • Activation fee
  • Recharge fee
  • Monthly or annual fee
  • ATM fee
  • Statement fee
  • Customer service call fee
  • Bill payment fee
  • Dormancy fee

Fees vary by card, so you’ll want to look for the best deal depending on your use. RushCard has a whole table full of fees that vary based on the plan you choose, but many of the fee types listed cost a dollar or two each time you incur them.

Yes: Working to control spending

Prepaid debit cards can help you budget. The main advantage is you can’t overspend like you can with a credit card. You can load a certain amount on to the card and make purchases until your money runs out.

For example, if you’ve budgeted for $150 a month a groceries, you can simply load that much on the card and use the funds until they run out. Then you just reload the card for next month.

Yes: Teaching kids responsibility with money

Prepaid debit cards can be a good tool for teaching kids or students about using plastic to make purchases.

Rather than handing them credit cards that can have credit limits of $500, $1,000, or even higher, prepaid debit cards can be loaded with a certain amount. When the money runs out, they can’t spend anymore, so there’s no chance of landing in debt or risk of damaging a credit score, either.

Yes: Protecting from identity theft

These cards are not tied to your credit, your Social Security number, or a bank account, so you need not worry about identity theft if your card is lost or stolen.

No: Looking for other protections

While prepaid cards might offer better protection from identity theft, you won’t enjoy many of the other safeguards that credit cards offer. Unlike with credit cards, your prepaid debit card and your money likely won’t be protected if the card is stolen or lost or used for unauthorized transactions.

Yes: Keeping money safe while traveling

Prepaid debit cards can be convenient for traveling. Rather than having to deal with traveler’s checks, these cards can be used both to make purchases and withdraw money from an ATM. If they’re lost, you won’t have to worry about someone fraudulently running up your bill since only the money on the card is on the line, and your credit won’t be in danger, either.

No: An all-around better deal than a debit card

All factors considered, a prepaid card still doesn’t beat out a traditional debit card. Prepaid debt cards have many more fees with fewer protections compared to a regular debit card. Unless the exceptions above say otherwise for your case, stick with a regular debit card for the best deal.

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