Prepaid cards have become more popular with consumers every year. When credit cards were easy to come by, there really wasn’t much demand for prepaid debit and credit cards. However, with credit tightening up across all markets, people are using prepaid cards to build up savings for a large purchase, keep on a budget or make purchases without having to open a bank account.
These cards provide the convenience of regular debit cards to people formerly locked out of the credit and debit card markets or who could not open traditional checking accounts. Prepaid cards are relatively risk-free to the banks issuing the cards because the people using them make a deposit into the bank’s escrow account. The credit card issuer acts as a checking account from which cardholders access their funds. Cardholders can shop with the card, spending up the prepaid value.
Many banks issue these cards through the major, well-known credit card brands. Merchants usually accept all prepaid debit cards without any problem but it’s important to understand the details.
What is a Prepaid Debit Card?
A prepaid debit card is a bank card that works like a regular debit card when you use it to shop. It is different from a regular bank debit card though, because you do not need to attach your own checking account to it. Instead, you deposit money onto the card in a “pay-as-you-go” system. You can reload or recharge the card as often as you need to and can spend as much money as you have on deposit with the issuing bank or card company.
Prepaid debit cards are safer than carrying around a “wad” of cash and provide more shopping convenience.
People who do not want to open their own bank accounts because of high fees or minimum balances prefer to use prepaid debit cards. However, some of the cards we recommend do allow you to link your own bank account to a prepaid debit card so that transferring money to reload the card is easier. Other card issuers do not permit you to link to your own checking account or may charge a fee if they do. Either way, prepaid debit cards are safer than carrying around a “wad” of cash and provide more shopping convenience.
These cards do not help you to rebuild your credit as the card issuer does not report your activity to the credit bureaus. If rebuilding your credit score is your goal, a secured credit card is a better choice for doing that.
How Do Prepaid Debit Cards Work?
You can purchase a card at a variety of stores. Cards often come “preloaded” with a certain amount of money on them or you can add your own amount when you check out. It’s also possible to buy a card online using another credit or debit card and have it shipped to you. And, it is sometimes possible for employers to use direct deposit to put funds directly onto the card.
When you have funds available on your card, you can simply start using it at any location where debit cards are accepted—almost everywhere. You can continue to add money to your card by setting up direct deposit, making a payment at a network of retailers or making a deposit at an ATM. Some cards allow you to make online transfers from your own checking account or even deposit a check through your smartphone.
A few cards allow you to use ATM machines to withdraw cash, pay your bills or access an online bill-pay system. It’s important to understand that fees for the services associated with prepaid debit cards may cost more than other bank cards or what your own bank would charge for the same service.
Additionally, fees and costs vary greatly among debit card companies offering these products. For example, you should understand whether the following kinds of services are available, how the fees are calculated and what the fees are:
- Activating your card
- Inquiring about the balance on your card
- Receiving a paper statement
- Making a deposit or withdrawal at a retail location or through an ATM
- Making a purchase but the transaction is declined
- Using ATMs that are out of the card issuer’s network
- Using your card infrequently and if there is a dormancy fee
- Closing your account and getting your balance back
You’ll also need to understand if the card company limits how much you can withdraw in cash, how much you can spend per purchase or how much you can deposit back into the card’s account in one transaction. Some card issuers also place limits per day or per month on different types of transactions.
Who Should Use a Prepaid Debit Card?
The short answer is that anyone can use a prepaid debit card. They benefit people who do not have or want to open a regular checking account for any number of reasons. Some people use these cards to help them stick to a budget and avoid overdrawing a checking account. You could dedicate one card to a certain type of expense, like gas, coffee or to save up for a vacation.
They are also helpful for:
- Teenagers on allowances learning how to manage money
- People on fixed incomes or protecting seniors from credit card scams
- People visiting from outside of the US
- As a gift card that will be accepted at almost any retail or online shop
Overall, prepaid debit cards offer many benefits. It is important to understand the fees and costs associated with each one and what action on your end triggers each type of fee. Think about what you need the card to do and narrow down your choices from there.