Prepaid Debit Card Tips & Facts
Prepaid cards function somewhat like debit cards: hence they're given the name "prepaid credit" or "prepaid debit" cards. They work by having the cardholder deposit some funds into an account -- funds which can then be drawn against when the card is used. They can be a way for teens, students, and other spenders to learn money management skills without having to juggle cash (or lose it, as is often the case for some folks). You're limited to spending only up to the amount you put into your prepaid card account.
Before you choose to pick up a prepaid debit card, there are a few things you should know.
- Prepaid debit cards are not true credit cards. A prepaid debit card may look a lot like a credit card, but in truth, it is much more like a debit or check card issued by your local bank. Prepaid cards require you to fund an account from which you can draw from, when you make transactions. You dip into your prepaid debit account much like how you'd use a checking account, instead of using a line of credit.
Prepaid debit cards offer an alternative to banks. After the credit crisis of 2007, millions of Americans turned their backs on the U.S. banking system. Prepaid debit cards make ditching the bank a much more convenient option. These cards allow individuals to make online payments, rent cars, book hotel rooms and buy airline tickets with the ease of a credit or bank account affiliated debit card, without the hassle of maintaining a bank account. This is also a viable option for people who cannot open a bank account due to past banking issues.
Prepaid debit cards do not require credit checks. Since you are funding the card with your own money, there is no need for the issuer to check your credit, therefore making such cards extremely attractive to customers with no credit or with bad or fair credit. Of course, having a prepaid card won’t help nor hurt your credit, since these accounts are generally not reported to any of the three major credit bureaus.
- Adding money is easy. Since the emergence of the prepaid debit reloadable card, more and more retailers and other outlets have made reloading these cards extremely easy. You can reload at a retail location, transfer money from your bank account, Paypal, or via direct deposit from your employer, or wire money to your account through services like Western Union.
There may be fees to pay. Although these cards can be a convenience, you should watch out for fees and charges before signing up. While traditional credit cards make money through charging you interest, prepaid debit cards choose the more direct, fee-driven method. Prepaid debit card issuers will usually charge you a monthly account maintenance fee, or possibly an annual fee, ATM fees, a reload fee and a few other transactional based fees for the convenience of carrying the card. Another charge you might run into is an application or activation fee. Be sure to compare these cards before you settle on one, since not all cards (and therefore fees) are created equal. You'll notice from our list above, that many cards are described as "low fee", but you'll need to check the details of these cards carefully to see how their issuers earn from their customers.
Prepaid debit cards offer customers without traditional bank accounts an easier way to track payments and to know just where their money goes. Online banking is the new wave when it comes to tracking your money every month, but individuals without access to online banking don’t have to worry. Most prepaid debit cards or credit cards come with a website that customers can use to view transactions, balances, and other aspects of their accounts, making money management possible.
Prepaid cards offer buyer protection. Just like any other Visa or MasterCard branded product, you can be sure that you are protected from theft and unauthorized usage. Not only are you protected by Visa or MasterCard, but also by the FDIC, up to $250,000, thanks to the bank issued debit card like qualities of the account.
Prepaid debit cards are also available through many retailers now -- you can buy them in certain denominations and use them like gift cards or prepaid phone cards. Supposedly, prepaid cards have become popular in part because consumers want to avoid overdraft fees on their checking accounts, which can be as high as $35 each instance. Weigh the costs for the different options you are considering.