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Prepaid Debit Cards

3 min read
Brendan Harkness By Brendan Harkness Mar 13, 2014 | Updated Oct 21, 2019

Prepaid debit cards can be an innovative way to manage your money. These cards don’t allow you to pile on personal debt because you spend only what is preloaded on the card, without making use of any credit. Hence, the cardholder assumes no risk whatsoever of ugly letters and phone calls from a collection agency.

Prepaid debit cards usually don’t affect your credit scores.

Advantages of Prepaid Debit Cards

  • Prepaid debit cards do not levy interest charges or overdraft fees.
  • They’re not directly linked to bank accounts, and so can help prevent identity theft.
  • Prepaid debit cards don’t make use of credit, and so are usually not connected to your credit reports.
  • Prepaid cards do away with the need for checking accounts and checkbooks, as well as with standard credit cards.
  • Some cards offer rewards like points that can be exchanged for gift cards.
  • Practical applications like managing a separate portion of your money, where you know precisely what you can spend and no more.
  • For young undergraduates, prepaid debit cards can be an unrivaled means of learning how to budget. Parents can load up a card via direct deposit, inter- or intra-bank transfers, or retail cash infusions.
  • Easier to avoid temptations to spend (more so than a credit card), because the money is spent immediately.
  • Prepaid cards function pretty much exactly like credit cards for transactions, except you can only spend the amount that has been preloaded on the card.
  • Useable nationwide and worldwide, including at any ATM (depending on your card’s network).
  • With many cards, every use can trigger a text to acknowledge the transaction, and you can also receive a daily account balance notification to help keep track of expenses.
  • All transactions are typically accessible online.

When shopping online or making a hotel reservation, a prepaid debit card works much like a bank-issued debit card. These cards can also be used in brick-and-mortar stores and at ATMs. Qualifying for a prepaid debit card generally doesn’t require a credit check. Consumers who have had financial problems and are unable to open bank accounts generally qualify for prepaid debit cards.

Disadvantages of Prepaid Debit Cards

1. Prepaid Debit Cards Have No Credit Building Components

Contrary to what you may have heard, prepaid debit cards typically can’t help you build up your credit scores. Prepaid debit cards can’t be used as part of a credit-building strategy because they aren’t reported to the credit bureaus. Prepaid debit cards work just like using cash and, therefore, are not predictive of how a person will manage his or her credit obligations in the future.

2. Prepaid Debit Cards Have Weaker Theft And Loss Protections

Recent legislation now requires prepaid card issuers to provide fraud and error protection policies, but you must register your prepaid card to be eligible. Consumers can dispute charges and stolen money can be restored; check with your prepaid card issuer for details.

But what if you don’t register? If you load $500 onto a prepaid debit card and lose it, it’s just like losing $500 in cash. You’re out of luck. Recovering the funds will likely be impossible.

If you lose a credit card with a $500 limit, however, and you notify the card issuer right away, then you really haven’t lost anything other than a little piece of pretty plastic. The card issuer will send you a new card, and there are fraud protections in place to protect you in case any unauthorized charges occurred before you reported the card as lost or stolen (even for secured cards where you have to put up a deposit).

3. Some Prepaid Debit Cards Are Loaded with Fees

Unfortunately, prepaid debit cards are notoriously loaded with outlandishly high fees which the card user gets trapped into paying. We’re opposed to the idea of paying any fee to use your own money, but you may find inexpensive prepaid cards that can be quite useful.

Some of the potential costs that come with a prepaid card include:

  • A one-time card purchase fee
  • A one-time card activation fee
  • A monthly maintenance fee
  • A service fee for ATM withdrawals
  • Service fees for ATM balance inquiries and declined transactions
  • Customer service calls

What Makes a Great Prepaid Debit Card?

Here are the most important things to look for:

  • No or low annual fee: You don’t have to pay much for a great prepaid card, so why should you?
  • Bad-credit friendly: Since you’ll be paying ahead of time and not relying on credit, you can use these cards even if you have bad credit.
  • Free ATM usage: You’ll probably be using ATMs fairly often, so charges would accumulate quickly.
  • Multiple methods of funding: Rather than needing to go to certain ATMs, some prepaid debit cards let you add funds to your account by other means, like PayPal, bank account transfer, or taking photos of checks with mobile phones.

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