If you haven’t seen or used one, a prepaid debit card looks and acts very similar to a regular debit or credit card. The biggest difference is that you don’t need to maintain an account. Instead, you simply ‘load’ the card by paying a cashier at a retailer or bank selling the card.
Prepaid Cards Are Expensive
According to a study done by the NFCC, over 75% of prepaid card users believe that they are saving money by using a prepaid card over a regular debit or credit card. Unfortunately this is almost never true. Almost all prepaid cards come with a range of built in fees. In fact, I don’t know of any prepaid cards where you can completely avoid fees. Depending on the card, you can be charged a purchase fee, reload fee, monthly fee, and a range of other fees.
A better alternative is to find a fee-free credit or debit card. A good bank will not charge any account maintenance or debit card fees, providing you don’t overdraft your account. A good credit card will come without an annual fee. Depending on the card, you’ll even earn rewards from your spending. A few good credit card options are the American Express Blue Cash Everyday or Capital One’s Quicksilver. Just be sure you only spend what you can afford and pay your bill in full every month to avoid being nabbed with interest.
Prepaid Cards Are Less Safe Than Credit Cards
Many prepaid card users also believe their money is safer on a prepaid card. They reason that they only lose the amount on the card if the card gets lost. Most credit cards, however, come with a $0 liability policy. If you lose your credit card or your somebody steals your card number, you are not on the hook for any fraudulent purchases. Simply call the card company as soon as you realize something is wrong, and they will remove all charges and send you a new card. Debit cards range in their fraud liability policy, but typically are between $0 and $50. Credit cards are the clear winner here, trumping debit cards and prepaid cards.
Prepaid Cards Discourage Saving
Many prepaid card users use their prepaid cards in place of a bank account. Many prepaid cards even offer the option of having your paychecks directly deposited on the card. Doing this all but guarantees that you will spend every penny of your paycheck. This leaves you vulnerable to debt when unexpected expenses hit.
A far better alternative is to have your money directly deposited in a regular checking account (fee-free of course) with an automatic transfer to a savings account. At the very least this helps you establish an emergency fund. With a good budget, you’ll also be able to save for future expenses and sock away at a retirement fund. These would be near impossible if your prepaid card was your bank account.
While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.