What You Need to Know About PrePaid Debit Cards

by Emily Guy Birken on October 16, 2012

Prepaid debit cards are big business, and only gaining in popularity. With myriad celebrity endorsements (including financial guru Suze Orman) and lots of promises, prepaid debit cards may seem like a fantastic way to keep yourself on budget without a traditional bank account. But there are plenty of drawbacks to these cards, as well. While using a prepaid debit card might be a sound financial strategy for some individuals, many may find them to be more trouble than they’re worth. Here is what you need to know before you jump on the prepaid bandwagon:

Fees

The businesses behind prepaid debit cards generally make their money through fees. Card-holders may find themselves paying for enrollment, activation, transaction, maintenance, minimum usage, and ATM withdrawal fees. It is possible to circumvent some of the fees. For example, if you have a scheduled direct deposit into the card each month, you can often avoid the monthly maintenance fee, only using in-network ATMs can help minimize those fees, and making sure you make the minimum number of purchases on the card per month will keep the usage fees at bay. But these costs should add into your assessment of whether the card is a good deal.

It is important to note that according to Michelle Burford of MSN.com, “a 2011 study released by Bretton Woods reports that those with traditional bank accounts often rack up more in fees per year than prepaid card users do. In some cases that’s because bank account holders dip into overdraft frequently or fail to keep the minimum required balance to dodge monthly fees.”

Basically, for individuals who cannot stay on top of a traditional bank account, a prepaid card could provide some relief from fees—as long as the card-holder knows what to expect going in and takes steps to avoid unnecessary fees. But if you are able to responsibly handle a checking account through your bank, that will certainly be the cheaper option.

Protections and Security

One thing to remember about prepaid cards is that they are not FDIC insured—but that may not matter. The brands issuing the cards (American Express, Discover, Mastercard, or Visa) offer consumer protection. This means that you do have recourse in the case of loss or theft, and that you can also dispute unauthorized charges. Since there is no government protection of your money, if your card issuer were to go out of business, you could potentially lose out. This is why it’s very important to only purchase pre-paid cards from well-established brands and issuers.

Credit

While pre-paid cards may look just like credit cards, there is a very important difference between them: pre-paid cards do absolutely nothing to help card-holders establish credit. In that way, using prepaid cards just like spending cash, except with more fees.

For individuals who want to rebuild or establish their credit history, a better bet would be a secured credit card. In that case, cash would be put down as collateral for the credit card.

The Bottom Line

Pre-paid debit cards can be the right option in some cases. But they are not a one-size-fits-all solution to budgeting problems, and anyone looking to acquire a prepaid card should read all of the fine print before applying.

The following two tabs change content below.

Emily Guy Birken

Emily Guy Birken is a freelance writer and stay-at-home mom who is passionate about personal finance. She lives in Lafayette, Indiana with her mechanical engineer husband and her toddler son. She blogs about parenting at The SAHMnambulist and about the funny side of money at Live Like a Mensch.
  • You make a good case against pre-paid debit cards. Would like hearing some more of the positives of them or situations where you think they would be beneficial for an individual to have.

  • I can’t conceive having to pay a fee, to use my own money, to prepay for things, while the debit card issuer also makes money on having my cash in the meanwhile, they should be free!

  • John S @ Frugal Rules

    I saw a show with Suze Orman a while back and she was dodging questions about the fees on her card. I understand it makes her money and I agree with much of what she says, but I just did not like that she would not be clear. They can be good for those that might not be able to use a traditional bank account for one reason or another, but I personally would not use them due to the fees associated with them.

    • holly

      I thought it was weird that Suze was in that business as well. Wouldn’t she suggest no fee bank accounts to her fans? She is out for herself, of course!

      • justin@thefrugalpath

        Sometimes the desire for money outweighs a person’s ethics. This does seem like a hypocritical move on her part. She often touts that people shouldn’t go to a financial adviser who makes a commission on a product, but she is advertising a card that kicks money back to her.
        What’s next, Dave Ramsey advertising his own credit card.

  • Veronica @ Pelican on Money

    I’m still a bit at a loss for reason behind a prepaid credit card. Am I the only one who has a free checking account with no fees / minimum balance? What’s the upside of using one?

    • Prepaid credit cards are great to build credit without going overboard. Prepaid Debit Cards, on the other hand, I agree, not sure what the point is.

  • I’ve been thinking of getting a prepaid debit card to use like a plastic version of the envelope system, and loading money onto the card for groceries, eating out and entertainment funds. Like you mentioned, they do have their place but you gotta watch out for fees and additional charges.

  • I don’t see myself ever going prepaid debit. Especially if there are any fees. I am a proponent of prepaid credit cards, on the other hand. I think it’s a great intro for teenagers to get into the credit card game without going into debt.

  • I’ve heard of pre-paid credit cards, but I was not aware that pre-paid debit cards were available. Like others below have mentioned, I too am at a loss as to why a person would need a pre-paid debit card.

    • They are good for people who can’t get checking accounts at a bank because they might have had to many overdraws.

  • I’ve heard of the pre-paid debit card but I’m almost 100% sure I’d never bother with them. Maybe for some they will see it as an advantage but not me. Interesting to learn about though. Mr.CBB

  • My dad doesn’t trust using his actual credit card on the internet so he normally uses prepaid credit cards. He feels more secure knowing that if he gets scammed his liability is limited to whatever he had on the card (normally a couple of hundred dollars) as opposed to the tens of thousands on his normal credit card.

  • Pingback: Mr.CBB’s Weekly Blog Post Picks~Oct 19,2012 « Canadian Budget Binder()

Previous post:

Next post:

20adfc1256bf162ccc214ed51df72b1328c896d9b40792f6e7