As banks add more fees, and as it becomes difficult for some consumers to obtain accounts at some of the big banks, prepaid debit cards are becoming popular.
Prepaid debt cards look a lot like “regular” debit and credit cards, sporting the logos of major payment processors like Visa, MasterCard, and American Express. You can use them anywhere major credit cards are accepted, so it makes them convenient.
However, no matter how much like a credit card a prepaid debit card is, it’s important to understand the difference.
Credit Card vs. Prepaid Debit Card
With a credit card, you are borrowing money up to a certain limit. You use the money first, and then repay it later. Additionally, if you carry a balance, you end up paying interest on that balance.
A prepaid debit card functions differently.
Instead of using the money first, you have to add money to the card before you can use it. You start out by putting money onto the prepaid debit card, either by purchasing the card with cash at a store, or by adding the money electronically from a regular bank account. It’s also possible to have your paycheck directly deposited onto a prepaid debit card.
If there isn’t money on the card, you can’t use it to make purchases. A prepaid debit card only accesses money you already have. However, because you are using money that you already have, you don’t have to worry about interest charges. In this way it’s not too different from using a gift card; once you spend it it’s gone (though you can refill a pre-paid card).
Just because you dont have to pay interest, though, doesn’t mean that you are free from paying fees with a prepaid debit card.
Many prepaid credit cards charge monthly fees, setup fees, reload fees, balance inquiry fees, and more.
Before you sign up for any prepaid debit card, you should look at the entire fee schedule, since a prepaid card can get rather costly over time.
Another thing to keep in mind is the fact that a prepaid debit card won’t help you build your credit score.
A prepaid debit card may look and function like a credit card, but it isn’t credit. That means that using it, and regularly reloading it, won’t help your credit score at all. If you want to help your credit score, and you can’t get a “regular” credit card, you might need to get a secured credit card. This is different from a prepaid credit card, and you shouldn’t confuse your prepaid debit card with a secured credit card.
Why Do People Use Prepaid Debit Cards?
Many people use prepaid debit cards because they are unable to get a more traditional bank account. These folks are known as “unbanked.”
They might not qualify for a no-fee account, or they might not be able to meet the minimum requirements for avoiding fees on some accounts.
A prepaid debit card can offer some degree of convenience when it comes to banking. It allows consumers to make online purchases, enroll in online/automatic bill pay, and receive the same convenience that comes with swiping plastic. Some of the better prepaid debit cards don’t have monthly fees, and some even offer savings options.
If you are looking for a prepaid debit card, here are some of the better options.
American Express Serve®
You can get this prepaid debit card, that’s backed by American Express, with no credit checks, no minimum balance, and no monthly fees.
Besides the benefits you get being able to pay with a prepaid credit card you also get additional benefits with Serve® like 24/7 customer support, Global Assist® services, Purchase Protection, Roadside Assistance, and more.
And check this out – get an American Express Serve card and you could get $50 when you use direct deposit. You have to enroll in direct deposit and use it twice to receive $250+ by the end of June, 2014. With direct deposit you can link your paycheck and have your money in your Serve account on payday.
Since April 15th is just around the corner you should know you can have your Federal Tax refund deposited to your Serve card. Not only will you get your refund fast but you can also get a $20 credit.
Use your Serve® card virtually anywhere that American Express is used as well as at ATMs worldwide. Add money to your Serve card for free at any of 15,000 CVS/pharmacy® stores and participating 7-ELEVEN® locations. And there are free ATM withdrawals at over 23,000 ATM locations across the nation.
You also get some neat features like sending and requesting money through Facebook/email/text, creating sub-accounts fro friends and family, and the use of their mobile app. You get to take advantage of membership benefits like Purchase Protection when you shop.
You can manage your money through your prepaid card, online account, and mobile app.
Link money to your Serve® card to a bank account, debit or credit card, or add money with MoneyPak®.
*Terms, conditions and exclusions apply.
PayPal™ Prepaid MasterCard®
This prepaid debit card allows you to instantly transfer money from your PayPal account to your PayPal Prepaid MasterCard. You’ll also get real-time mobile alerts on transactions and balances (good to track the card if you use it for a college student).
Direct deposit is free for this card (and also helps to get your money to your account quicker form your employer).
There is no credit check, overdraft fess, or interest charges. It even offers cash back rewards.
American Express® Prepaid Card
The American Express Prepaid card offers free direct deposit and no monthly, annual, or purchase fees. There’s also no overdraft, inactivity, or foreign exchange fees (nice if you are traveling). And there’s no credit check. You’ll get one fee-free ATM withdrawal per month (after that it’s $2 per withdrawal).
With this card you get the the backing of American Express which includes 24/7 customer service, Purchase Protection, Roadside Assistance, Global Assist® Services (if you’re traveling more than 100 miles from home and have an emergency they can help), and more.
Load your card via direct deposit, from a bank account, with MoneyPak®, or through the Vanilla Reload Network®.
If you are unable to get a bank account and need easier ways to make purchases then a prepaid debit card is a nice option. It’s also good for limiting and tracking spending, like if you were to give one to a college student. Just make sure you understand all of terms and fees before signing up, if you aren’t using one of the best prepaid debit cards then you’re going to rack up fees quick!
You are right, pre-paid cards can be a great alternative for those who are ‘unbanked’. But I would hesitate to give a pre-paid card to a college student. Since pre-paid card spending is not reported to the major credit reporting agencies this would not help the student start to establish credit. I know it is a risk giving a teenager a credit card and asking them to use it responsibly, but the student having an established credit history can help greatly with student loans reapplications, and applying for apartment leases after graduation. In my experience my early credit history definitely helped me land lower interest rates than some of my peers.
Anyway…just a thought…
Glen Craig says
You make good points. I think it depends on the situation and the person. For some students they might not be responsible enough to handle credit cards yet and giving them one might only work to hurt their credit scores. With a prepaid debit card you have a finite amount of money that they can go through.
Glen, I am glad to see that you pointed out that pre-paid cards do not boost a person’s credit profile. Good post.