Advantages and Disadvantages of Prepaid Debit Cards

Prepaid debit cards are becoming increasingly popular financial products. With a prepaid card, you load money onto an account associated with a card. The card works like a credit card in that you swipe at a terminal to make payment. However, unlike a credit card, you are using your own money when you use a prepaid debit card. The purchase amount is deducted from the balance you have on your card. Once you run out of money on the card, you are required to add more funds if you want to keep spending.

Photo by gruntzooki.

Why Do People Use Prepaid Debit Cards?

Advantages of Prepaid Debit Cards

Prepaid debit cards are becoming increasing popular among the unbanked. These cards allow those without bank accounts (and who might not qualify for bank accounts) access some of the same conveniences. Most prepaid cards allow you to arrange direct deposit for your paycheck, and it makes it easy to make purchases online and offline without the need for cash.

Prepaid debit cards are normally accepted anywhere that credit cards bearing the same logos are accepted. This brings the convenience of plastic, but keeps the consumer from paying interest. It’s also possible to arrange for online bill pay and automatic withdrawals when you have a prepaid debit card. For many, a prepaid debit card functions much like a checking account.

Disadvantages of Prepaid Debit Cards

It is important to note, though, that prepaid debit cards are not the same as credit cards. Using a prepaid debit card will not improve your credit score.

You should also realize that prepaid debit cards often come with an array of fees that can sap your funds. Many cards have activation fees, as well as monthly fees. You might also be charged just for checking your balance at an ATM, or even for reloading your card. For the unbanked, paying a fee of $4.95 per month is still cheaper than getting a “second chance” checking account that might charge as much as $9 or more a month.

Before you choose a prepaid debit card, it’s important to understand the costs involved. For many consumers, it is more cost-effective to open a free checking account at a bank or credit union.

However, the increasing popularity of prepaid debit cards, especially as a way for parents to manage their kids’ allowances, has led to some cards that aren’t downright terrible.

Best Prepaid Debit Cards

The best prepaid debit cards won’t charge you a monthly fee. Or, if you are charged a fee, the best cards will waive it if you complete certain actions. Also, look at the card’s list of fees before signing up. Try to use a prepaid card with fewer fees.

Some of the better choices include:

• Green Dot: You can get a Green Dot Prepaid MasterCard or a Green Dot Prepaid Visa. Both of these cards come with no activation fee when you use online activation. There is a $5.95 monthly fee, but it is waived if you deposit at least $1,000 a month, or if you make 30 qualifying purchases with the account.
• Mango Money: This prepaid debit card is aimed at savers. You can earn up to 6% on your money. The monthly fee is waived when you load $500 a month, the $5 monthly fee is waived.
• Vision Premier Card: This prepaid debit card features 1% cash back on gas purchases, as well as a savings account. Unfortunately, there are some fees with this debit card, including an activation fee and a monthly fee. If you use direct deposit, your monthly fee is $7.95 per month; it’s $9.95 per month without direct deposit.
• PASS from American Express: This card is marketed as an allowance solution. This card doesn’t charge you for reloading, if the funds come from direct deposit or bank account transfer. Additionally, the first ATM withdrawal of each month is free. There aren’t monthly fees, and there are almost no other fees.

For more options, please check our list of prepaid debit cards.

Miranda Marquit

Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own blog at Miranda Marquit.