8 Reasons to Use Prepaid Debit Cards

Mixed race woman handing credit card to cashier
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By Allison Martin

Endorsements from Earvin "Magic" Johnson, Suze Orman and the Kardashians haven't helped the image of prepaid debit cards. They have received a bad rap for excessive fees (some celebrity cards have had really high fee) and restrictions. However, prepaid debit cards do have some built-in benefits, and some cards have extra features that make them a feasible alternative to a traditional checking account.

And they're becoming much more popular. Writes the Consumer Financial Protection Bureau: "For example, the amount of money consumers loaded onto "general purpose reloadable" prepaid cards grew from less than $1 billion in 2003 to nearly $65 billion in 2012. The total dollar value loaded onto general purpose reloadable cards is expected to continue to grow to nearly $100 billion through 2014." Here are eight benefits if you're considering getting a prepaid card.

1. Efficient Budgeting

If you struggle to keep your spending under control, a prepaid debit card may be worth a shot. Reasoning? With most prepaid cards, once the cash is gone, it's gone, and there's no way to spend more than you have at your disposal. In fact, they're perfect for parents who want to give their children access to spending money without the possibility of exceeding what's available.

2. No Overdraft Fees

This feeds off my last point. Have you overdrawn your checking account by a few dollars, only to find yourself slammed with a big fee or even multiple fees? Some banks reorder the charges from largest to smallest, which produces a larger number of overdraft fees. With most prepaid cards, there's no danger of overdrawing the account.

3. Privacy

You can acquire a prepaid card without providing any personal information. Because your personal identifying information won't be stored in a database, the chance of your identity being compromised is nonexistent.

However, you will have to provide information if you want to reload the card. Writes Odysseas Papadimitriou, CEO of CardHub: "To reload a prepaid card and use it as an alternative checking account, a replacement check cashing tool, or a means of distributing monthly allowances to your kids – the three most common roles that prepaid cards play – you need to activate it with the issuer. That, of course, entails providing a certain amount of personal information, including your name, contact information, and Social Security number."

4. Reloading Capabilities

Some prepaid debit cards can be reloaded online, so you don't have to head to the store each time you have exhausted the available balance.

5. ATM Withdrawals

Need to grab a few bucks from the card because the merchant does not accept plastic? You should be able to withdraw funds from an ATM by using the personal identification number, or PIN, but be prepared to pay a fee.

6. Consumer Protections

Credit and debit cards aren't the only pieces of plastic that offer protection against fraud. Says Bankrate: "[Prepaid debit cards] that are network-branded, which most are, get some consumer protections through the payment network whether it's Visa, MasterCard, American Express or Discover. Cards that are lost, stolen or fraudulently misused might be covered by deposit insurance or a zero-liability policy, as some companies extend this protection while others don't."

7. No Credit Risk

Let's say you're in the market for a new home and also need to make a big purchase. Using a credit card means the large balance will show up in your credit reports right when potential lenders are checking your credit. A purchase made with a prepaid debit card is not reported to the major credit bureaus and will be off the credit radar.

Did you run across a prepaid debit card that claims otherwise? If so, it may be in your best interest to take it with a grain of salt. Says the Consumer Financial Protection Bureau: "The three main credit bureaus used by most lenders usually do not consider your prepaid card activities when they develop your credit report. With very few exceptions, most prepaid card providers who claim to offer a way to build your credit history report your activities only to a lesser-used credit reporting agency, not one of the three major credit reporting agencies used by most lenders."

8. Direct Deposit

Your paycheck and other types of payments can be directly deposited to your prepaid debit card.

Should You Get a Prepaid Debit Card?

The answer depends on your financial situation. Consumer Reports says, "Given many prepaid cards' multitude of fees and paucity of guaranteed protections, a regular debit card from a bank or credit union is likely to be a better deal if you can qualify for one."

Whether a prepaid debit card is a good substitute for a bank account is a matter of debate. [Terry Maher, general counsel for the Network Branded Prepaid Card Association] says prepaid cards are suitable for people who are outside the banking system. "They could be living in a community that's underserved by banks or have had prior issues with a bank, so they may not be able to qualify for an account," he says.

Most importantly, the fees associated with the card should not outweigh the benefits and should be comparable to or less than those for a traditional checking account.

Once you've decided a prepaid debit card will best suit your needs, there are multiple factors you need to consider, starting with the fees -- and there are a lot. Consumer Reports suggests analyzing the fine print for these:
  • Activation or initiation fees.
  • Monthly fees.
  • Point-of-sale transaction fees.
  • Cash withdrawal fees.
  • Balance inquiry fees.
  • Fees to receive a paper statement.
  • Fees to call customer service.
  • Bill payment fees.
  • Fees to load funds on the card.
  • Dormancy fees for not using the card.
  • Fees to get your remaining funds back if you close the account.
  • Overdraft (yup) and shortage fees.
There's good news on the horizon. The Consumer Financial Protection Bureau recently proposed regulations that would grant prepaid-card holders the same protections as those afforded to those with bank accounts.
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