Is Prepaid Debit a Good Idea?

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Prepaid Debit CardIn recent months, there has been a lot of discussion about prepaid debit cards. From the introduction of Suze Orman’s prepaid debit card, to suggestions that you don’t need a bank account if you have a prepaid card, to a general push by issuers to encourage parents to use prepaid debit cards as learning tools, it seems like prepaid debit is everywhere.

But what is prepaid debit? And is it really a good idea?

The Basics of Prepaid Debit

A prepaid debit card is one that you can load up with funds and use as a credit or debit card. These cards usually come emblazoned with the logo of a payment processor, like Visa, MasterCard, or AmericanExpress, and can be used wherever the logo is accepted. A prepaid debit card doesn’t need to be attached to a bank account. Many prepaid debit cards also allow for direct deposit, so your paycheck can be deposited onto the card automatically.

When you use a prepaid debit card for a transaction, it works like any other plastic method of payment. However, the money comes from the funds associated with the card. You can’t spend more than you have. Prepaid debit offers the convenience of a credit card without the debt, and without the need for a bank account.

The Drawback to Prepaid Debit: Cost

Prepaid debit is being touted as a way to teach kids the ways of plastic, and as a way to conveniently manage finances without debt, and without the need for a bank. However, the costs of prepaid debit cards can be quite high. Many prepaid debit cards include the following fees:

  • Account opening fee
  • Fee to load the card
  • ATM fees (including to check your balance)
  • Inactivity fee if you don’t use the card
  • Monthly fee just for having the card
  • Fee when you buy a prepaid debit card at a retailer

These fees start to add up quickly. The good news, though, is that there are some prepaid debit cards with relatively low fees. The WalMart MoneyCard Prepaid Card, the American Express Prepaid Card, the UPside Visa all feature no monthly/annual fees, or very low monthly fees if you load a certain minimum each month. If you shop around, it’s possible to find good deals in prepaid debit cards, and these cards can work well if you can avoid fees.

Prepaid Cards: Ideal for the “Unbanked”

Prepaid cards are being marketed as an alternative to opening an account with the big banks and their big account fees. However, many prepaid debit cards end up costing more each month than an account fee at a bank. Plus, there are still plenty of banks out there that offer free checking and other fee-free banking services.

In reality, prepaid debit cards are most ideal for those who are “unbanked.” This is a segment of the population that can’t qualify for a bank account, whether it’s because of a certain financial situation, or because a ChexSystems report or some other consumer report disqualifies them. If you can’t get a bank account, compare the cost of prepaid debit to what you are paying to use checking cashing places for your paychecks. You might find that you can save money with prepaid debit.

For most consumers with the ability to use a bank account, prepaid debit probably isn’t the way to go. Some of the low cost or free options might be attractive for those who want additional flexibility and convenience in family finances, but, for the most part, prepaid debit is a poor substitute for fee-free banking.

(Photo: beaugiles)

{ 11 comments, please add your thoughts now! }

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11 Responses to “Is Prepaid Debit a Good Idea?”

  1. I wondered what the catch was to pre-paid cards. It seems more and more all of those little fees are costing us lots of money.

  2. longhorns says:

    Why did you omit prepaid credit cards/

  3. govenar says:

    no cashback rewards like credit cards…

  4. Grant says:

    I’ve heard some say this is just another way the banks can make money off the poor while they cater to the rich. Definitely a political motivation there I would say, but nonetheless you can call it an additional tax/fee one way or the other on the lower income. It is definitely a situation where you’re stuck between a rock and a hard place. I’m fortunate enough to use credit cards. I would be categorized as a deadbeat to them, as I only make money off them, since I pay my balance off monthly. It is an interesting situation that those who have the most and spend the most get the benefits while those on the opposite end get nickel and dimed. On the other side, they also carry the most risk, so this is while the system is setup as is. Not sure if there’s one solution that solves these issues.

  5. John Vine says:

    Just because there are costs involved, it does not make such cards a bad idea as such.
    The low-fee alternatives can certainly be useful in a number of circumstances.
    There is an important difference psychologically, when spending on plastic as opposed to cash, so the training aspect can be valuable.
    IMO, these cards offer an extra useful choice.

  6. Lei Lani says:

    There is also the Visa BUXX card. I got one for my son a few years ago through US Bank (which manages my Harley Visa). No fee for the card, no fee to transfer from my credit card to his prepaid debit card, no inactivity fees. I set up an allowance schedule, and paid my bill each month, so there were no interest charges on my Visa. (US Bank didn’t treat it like a cash advance, but like a normal charge that did NOT earn bonus points) The Visa BUXX is marketed to teens, but there was no restriction on age, or loading requirements.

    • Shirley says:

      Now that’s a plan I could see being perfect for all involved, and especially for an out of town student.

  7. Dusty says:

    BEWARE – Green dot PP – stole my roommates SS# and took her disability check – she only paid for a $50.00 & 4.95 fee with cash! In order to “activate” your card, they make you give info that allows them to get into your bank account! BEWARE of Green Dot if you have a checking account.

  8. Marytas says:

    The fee is too high…

  9. will says:

    I have a prepaid card issued by BankFreedom. They routinely ADD to the dollar amount of the authorization thus tying up your funds until the transaction settles. They do this for hotel charges, on-line charges, rental car. They claim it is the merchant holding the funds but I have seen the amount several merchants authorized and it does not match what they claim was authorized. Avoid BankFreedom.

  10. Carynne says:

    I wanted to use one of these cards but the monthly fees are a little high for me, at $4.95 a month that adds up to almost $60 a year. I don’t have credit cards due to very bad credit issues. I just will wait until my credit gets better and then try to rebuild it with a credit card.

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