5 Reasons to Consider Using a Prepaid Debit Card

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5 Reasons to Consider Using a Prepaid Debit Card

General purpose reloadable prepaid cards, more commonly known as prepaid debit cards, are more popular than ever before. A June 2015 Pew Charitable Trusts study found that prepaid debit card use increased by more than 50 percent between 2012 and 2014.

Why the increase? While it's important to note that prepaid debit cards often come with fees, they also can provide a variety of benefits if you don't have -- or want - a checking account, credit or debit card. Below are five reasons why you may want to consider a prepaid debit card.

1. They typically don't require a credit check.

If you have a thin, nonexistent or bad credit history, getting approved for a credit card can be difficult. Prepaid debit cards generally don't require a credit check, so anyone can get one and use it to buy goods at any merchant that accepts the affiliated credit network - for example, Visa or MasterCard.

However, most prepaid debit cards don't report your activity to the credit bureaus, so using one typically won't help you build your credit history.

2. They can be useful for budgeting.

Even if you already have a debit or credit card, prepaid cards can be useful budgeting tools because you can load a specific amount of money onto the card each week or month, and that amount is all you can spend.

You can also give a prepaid card to a relative, such as a college student or elderly parent, and use it as a way to send allowance.

However, some cards may charge a decline fee if your transaction is declined at the register. According to an April 2014 study by Bankrate.com, decline fees vary by provider and range from 40 cents to $2 for every failed purchase.

3. You won't need to worry about overdraft fees.

Checking account overdraft fees can turn a $5 purchase into what can often be a $30 to $35 mistake. However there's no chance of overdrafting with a prepaid debit card that's not connected to your checking account - although the decline fee may still apply.

According to the Pew study, 72 percent of survey respondents who aren't members of a bank use their prepaid cards to avoid overdraft fees.

However, if you have a bank account and the main reason you're interested in a prepaid debit card is to avoid overdraft fees, a cheaper alternative may be to disable overdraft protection on your checking account. This can usually be done online or with a quick phone call to your bank.

Your debit card will then be declined if you have insufficient funds, which may be inconvenient but it would be no different than if you didn't have enough money on a prepaid card.

However, be aware: You still can overdraft when writing checks.

4. You can shop and pay bills online.

If you don't already have a debit or credit card, a prepaid debit card with a credit card icon such as Visa, Mastercard or American Express on it can be used to make purchases online or over the phone as if it's a debit or credit card.

Linda Sherry, a spokeswoman for Consumer Action, a consumer advocacy group, says that in this way, a prepaid card is virtually indistinguishable from a debit or credit card.

Many prepaid debit cards also have a bill pay function that allows you to set up one-time payments and recurring payments, such as the monthly phone bill. Just be aware that if you set up a recurring payment and you don't have enough funds in a particular month to make the payment, the merchant can suspend or cancel your service.

5. They let you quickly and easily get paid.

Some prepaid debit cards may offer a free direct deposit benefit that allows you to automatically deposit your paycheck, Social Security payment or tax refunds into your account.

Brad Fauss, president and CEO of the Network Branded Prepaid Card Association, a prepaid card trade association, says that this allows you to get your money quicker and avoid potential delays in the mail.

Plus, you may save time and money compared to using a check cashing service, which typically charges a flat fee or a percentage of the check in order to cash it. For example, to cash checks amounting up to $1,000, Walmart charges a flat fee of $3.

Bottom Line

Reloadable prepaid debit cards may come with fees you should look out for, such as ATM decline fees, monthly fees and reload fees. But it can also be a good alternative if you don't want or have a credit card or a checking account with a debit card. Always compare cards, read the fine print and find one that best fits your needs and lifestyle.

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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All Comments

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Top Contributor
1936 Contributions
3081 People Helped

Ha,

 Reasons to shoot down this artical.

1) "However, most prepaid debit cards don't report your activity to the credit bureaus, so using one typically won't help you build your credit history."

How about None of the Prepaid Debit Cards report.

2)  "However, some cards may charge a decline fee if your transaction is declined at the register. According to an April 2014 study by Bankrate.com, decline fees vary by provider and range from 40 cents to $2 for every failed purchase"

Fee's   Nobody wants a Fee.

3) " For example, to cash checks amounting up to $1,000, Walmart charges a flat fee of $3."    

thats 3 dollars I want to Keep.

How about some good Articals on teaching folks how to BUDGET!  How to Handle Money without giving it away!

Credit Karma Team
Top Contributor
2949 Contributions
4777 People Helped

Thanks for posting. Remember that everyone's situation is unique, and among our 40M+ members, there are a variety of needs and interests. We respect your decision not to use a pre-paid debit card, and ask that you respect the right of others to learn more about them. Thanks! 

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