If you're looking for a better way to budget your money, you may want to consider a prepaid debit card. With no bank account or credit history required, these cards are easy to get and simple to use. Read on to learn more about the upsides--and downsides--of these nifty financial tools.
How do prepaid debit cards work?
Unlike other debit cards, prepaid debit cards are not typically connected to a bank account and allow you to load money directly onto the card. Because these cards pose no credit risk to card providers, they're not hard to get. You'll likely be able to purchase one at a drug store, gas station or card provider website.
There are two types of prepaid debit cards: open-loop and closed-loop.
- Open-loop cards are typically identifiable by their network logo, like Visa®, MasterCard®, American Express® or Discover®. You can use these cards wherever these brands are accepted.
- Closed-loop cards can only be used at a specific retailer or for a certain purpose. A card issued by a retailer is closed-loop, for example, because it can be only used at the retailer's stores. Similarly, a transit card might only be used for purchasing bus, train or ferry rides.
Once you've spent the balance on your card, you can usually load more money onto it, either by having your paycheck directly deposited onto the card, transferring money from your checking account, or buying a "reload pack." Your reload options will depend on your card provider, though, and may come with a fee.
Why do people use prepaid debit cards?
Prepaid debit cards used to be considered a tool primarily for those with fragile finances or limited access to banks, since you don't need a bank account or good credit to get one. However, they are now widely used across all socioeconomic levels. This might be because many card providers now offer theft protection, so they can be safer than cash. And since you can only spend as much money as you put on them, they can serve as useful budgeting tools. A family going on vacation, for example, could use prepaid debit cards--many of which are accepted around the world--for all its travel purchases to avoid overspending.
What do I need to watch out for?
While prepaid cards can be a great way to gain control over your finances, they often come with downsides.
- Hidden fees. Prepaid debit cards typically come with a variety of fees, many of which aren't shown on the packaging. These can include fees for activating the card, withdrawing money, using an ATM and inquiring about your balance. Some cards even have dormancy fees, which you're charged if you don't use your card enough.
- Limited federal protections. Prepaid debit cards aren't covered by all of the same legal regulations that protect normal debit and credit cards, so you may be more susceptible to fraud and merchant mistakes. While most card providers offer protections voluntarily, they can drop them at any time. For prepaid cards without theft protection, if you lose your card, you lose your money.
Prepaid debit cards are a relatively simple way to manage your money, so long as you are aware of the fees you may be subject to and the protections you could lose out on. Luckily, card providers have begun eliminating or reducing many of their fees, making prepaid debit cards more attractive than ever. Still, it may be wise to go over the card's terms and conditions and read consumer reviews before you sign up.
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