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.
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.
Emily Guy Birken
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