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Is Prepaid Debit a Good Idea?

In recent months, there has been a lot of discussion about prepaid debit cards. From the introduction of Suze Orman’s prepaid debit card [3], 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 [4], 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:

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 [5]. 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 [6])