Prepaid Debit Cards

Brendan Harkness

Brendan Harkness

Updated May 08, 2018

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Prepaid debit cards usually don’t affect your credit score

Prepaid debit cards can be an innovative way to manage your money. These cards do not 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.

Advantages of Prepaid Debit Cards

  • Prepaid debit cards do not levy interest charges or overdraft fees.
  • Not directly linked to bank accounts, can help prevent identity theft.
  • Prepaid debit do not make use of credit, and so are usually not connected to your credit report.
  • 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 the card via direct deposit, inter- or intra-bank transfers or by retail cash infusions.
  • Easier to avoid temptations to spend more than a credit card, because the money is spent immediately.
  • The prepaid card functions exactly like a credit card, except that you can spend only the amount that has been preloaded on the card.
  • Useable nationwide and worldwide, including at any ATM.
  • With many cards, every use will trigger a text to acknowledge the transaction, and you can also receive a daily account balance to help keep track of expenses.
  • All transactions are 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. Unlike bank-issued debit cards, 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 Component.

Contrary to what you may have heard on some advertisement, prepaid debit cards cannot possibly help you to build your credit reports. The reason why it is impossible for prepaid debit cards to be used as part of a credit building strategy is because these cards do not and have never 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/her credit obligations in the future. That is why they never show up on credit reports.

2. Prepaid Debit Cards Have Little or No Theft or Loss Protection.

If you load $500 onto a prepaid debit card and you lose your card then it is as if you just lost $500 in cash. You are out of luck. Recovering the funds will likely be impossible. If you lose a secured credit card with a $500 limit and you notify the card issuer right away then you really haven’t lost anything other than a little piece of pretty plastic. The secured 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.

3. Prepaid Debit Cards Are Loaded with Fees.

Unfortunately, prepaid debit cards are notoriously loaded with outlandishly high fees which the purchaser of the card gets trapped into paying. Prepaid debit cards often card surcharge fees, activation fees, ATM fees, card maintenance fees, etc. Admittedly, there are some prepaid debit card products which are cheaper than others, but I certainly am opposed to the idea of paying any fee to use my own money.

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

  • A one-time card purchase 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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