Is a Prepaid Debit Card Right for You?

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Is a Prepaid Debit Card Right for You?

Prepaid debit cards are like gift cards that can be reloaded and used over and over again. You have an account that's tied to the card, and you can generally deposit money into it and use the card to pay bills, make purchases or withdraw money from an ATM - all without having to open a bank account attached to the card.

Prepaid cards may be appealing to people who don't have - or want - a checking account, have a less than ideal credit history, or are tired of paying hefty checking account overdraft fees (prepaid debit cards may charge decline fees but they're typically a lot less expensive.)

Below, we answer common questions and concerns about prepaid debit cards to help you determine if it could be helpful for your financial situation.

How does a prepaid debit card differ from a debit card or credit card?

  • With credit cards, you make a purchase and pay for it later. With debit cards, you make a purchase, and the money is immediately taken from your account. Using a prepaid debit card, you can spend whatever you've loaded into your account.
  • You don't need to have a checking or savings account with a bank in order to get a typical prepaid card, even if the card provider is a bank (for example, Wells Fargo or Bank of America).

Unlike credit or debit cards, prepaid card issuers aren't required to protect or assist you if you're double-charged by a merchant or your prepaid card is lost or stolen. While some prepaid debit cards do include protections, the Consumer Financial Protection Bureau (CFPB) has proposed new rules that may mandate these protections, although if adopted, they likely won't go into effect before January 2016.

How and why do people use prepaid cards?

  • A February 2014 report from The Pew Charitable Trusts, a nonprofit focused on improving public policy, found that many people use prepaid debit cards to budget and make purchases at places that don't accept cash. Prepaid card users also like the reduced risk of overdrafting or overspending.
  • One of the biggest advantages of prepaid cards is that they generally don't require a credit check, which can make them a good option if you don't have good credit or any credit history. However, using a prepaid card may not help you build credit, as they're typically not reported to the major credit bureaus.
  • Depositing money into a prepaid debit card account is often cheaper than check-cashing services, which may charge $3 to $6 or a percentage of the amount being cashed. Reloading a prepaid card may be free with direct deposit or when reloading at select retailers; otherwise, the fees generally range from about $3 to $5 per reload.

If you have a checking account and you're considering a prepaid card solely to avoid overdraft fees, which can amount to $30 or more per incident, a potential alternative may be to ask your bank to disable overdraft protection so that they'll decline your debit card if your bank balance is too low, rather than overdraft.

However, remember this overdraft "opt out" may not apply if you issue a check and it bounces, or if you have an automatic payment set up. Also, some prepaid card providers charge decline fees of up to $4 every time you attempt a transaction and it's declined.

Where do I get a prepaid debit card?

You can buy prepaid debit cards at many stores, including Walmart, Target and 7-Eleven. The cards typically cost between $4 and $10 when purchased in stores.

Several prepaid debit cards, such as the American Express® Serve Cash Back (issued by Amex, a Credit Karma marketing partner) and Green Dot, can be ordered online for free. However, these cards may incur a monthly fee - for example, American Express® Serve Cash Back charges $5.95 per month (unless you live in Texas, New York or Vermont) and Green Dot charges $5.95 per month.

How do I deposit money into my account?

Money can generally be added to your account wherever prepaid cards are sold. You can deposit cash into your account at a register, or typically, you can use a check, debit card, gift card or credit card (what's accepted will depend on the store).

However, many cards will charge reload fees every time you add money to your card at a register. Green Dot charges up to $4.95; the Walmart MoneyCard® charges $3.

Alternatively, you can buy a reload pack, which is like a gift card that's used for adding funds to prepaid accounts. The money can be added to your account online or over the phone. Again, you may incur a fee adding these funds to your prepaid card.

Card issuers also often allow you to add funds to a card by setting up a direct deposit from either a paycheck, tax refund or Social Security payment - typically you can add money this way for free.

Are there fees involved?

While many prepaid cards charge fees, the Pew study found that two-thirds of prepaid card users didn't compare terms or fees before signing up for a card.

If you're not careful, you could find yourself paying a monthly fee as high as $10, plus up to $2.50 every time you use an ATM.

The fees are complicated to navigate because they vary from card to card, as does the language describing the fees. For example, depending on the card, new customers may be charged an enrollment fee, activation fee or initiation fee, but in practice all three are generally the same.

Are there ways to avoid fees?

There are ways you can avoid some fees but, for example, if your card charges a monthly service fee, there's often no way to avoid that.

If there's a fee to withdraw money from an ATM, you may be able to avoid it by getting cash back while making a purchase. In addition, some cards charge a fee to check your balance at an ATM, but don't charge anything to check your balance online.

Reload fees are common, but may be waived if you set up direct deposit. Monthly account fees may also be waived if you enroll in direct deposit or make a certain number of purchases each month.

For example, the Green Dot® Prepaid card has a monthly fee of $5.95 that's waived if you make 30 purchases or load at least $1,000 into your account during a billing cycle.

Bottom Line

If you think a prepaid debit card is a good fit, shop around to find the card that will work best for you. You'll likely want one that has as few fees as possible and is FDIC-insured. You may also want to look for a card that can be easily reloaded at nearby stores and has in-network ATM locations nearby.

About the Author: Louis DeNicola is a personal finance writer and educator. In addition to being a contributing writer at Credit Karma, you can find his work on MSN Money, Cheapism, Business Insider and Daily Finance. When he's not revising his budget spreadsheet or looking for the latest and greatest rewards credit card, you might spot Louis at the rock climbing gym in Oakland, California.

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