Credit Karma Guide to Prepaid Debit Cards
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If you want to avoid debt, need help with budgeting or don’t have a bank account, a prepaid debit card could be a helpful tool. In this guide, we’ll help you consider the pros, cons and different options of prepaid cards so you can decide if getting one is right for you.
Good news for those without a credit card or bank account: debit and credit cards aren’t the only plastic payment options out there.
Prepaid debit cards are an alternative payment method. They help give consumers the freedom to pay for purchases online or on the phone, in addition to in-store purchases, without needing a credit card or bank account. You can also use your card to pay bills online. And they offer features you may not get with a debit or credit card.
While prepaid cards may sound like a perfect solution, they also come with some drawbacks — such as charging fees or lacking helpful attributes that come with debit and credit cards.
Don’t worry, though. In this guide, you’ll learn some of the important aspects you should know about prepaid debit cards — the pros, the cons and your options — so you can determine for yourself whether it’s worth getting one.
How do prepaid debit cards work?
Also known as pay-as-you-go cards, prepaid debit cards allow you to spend only what you load onto the card. You can typically add money via direct deposit, bank transfer, mobile check deposit or cash reloads.
Once you’ve loaded money on the card, you can then use your prepaid card just as you would a debit or credit card. (Except, of course, once you’ve used up the amount you loaded onto the card, you’ll need to add more to use the card again.) But just like other plastic payment methods, prepaid cards use payment networks like Visa, Mastercard, Discover and American Express.
Just remember: unlike credit cards, prepaid cards don’t offer credit lines. And unlike debit cards, they’re not tied to a checking account.
How to get a prepaid debit card
Depending on which card you want, there are a few different ways you can apply.
- In-store: Some retailers, like Walmart, allow you to purchase and load money onto a new prepaid card.
- Online: Many prepaid cards allow you to apply through their websites.
- At a branch: Some banks, like Chase and Wells Fargo, offer prepaid cards that you can apply for at your local branch.
Who uses prepaid debit cards?
According to a 2015 survey by the Pew Charitable Trusts, there are three main groups of people who use prepaid cards: the unbanked, the debt-averse and the budgeters.
“[Prepaid debit cards] often serve workers who don’t have a regular checking account,” says Adam Rust, managing director of WiseWage, a nonprofit organization that helps connect consumers with the right prepaid or payroll cards.
“Many people identify these consumers as unbanked. I like to break it down further into the formerly banked, the never banked and [currently] unbankable,” Rust says.
According to a 2015 survey by the Federal Deposit Insurance Corporation, people don’t have a bank account for a variety of reasons, including the following:
- Lack of privacy
- Mistrust of banks
- Bank account fees
- Identification, credit or former-bank-account problems
- Inconvenient hours and locations
- Insufficient funds to keep in an account
Prepaid debit cards don’t offer a line of credit, so you can’t rack up debt with one the same way you can with a credit card . If you’ve had issues with overspending in the past or you want to avoid the temptation altogether, a prepaid debit card may help.
Keep in mind, however, that some prepaid debit cards do come with optional overdraft protection, so it is possible to overdraw your account and incur a fee.
How can I avoid overspending with a credit card?
It’s possible to go into debt with a credit card, but you don’t have to. Here are a few things you can do to help get the benefits of credit while minimizing the drawbacks.
Create and live on a budget. Keeping your spending in check is key here. After all, you can overspend even without a credit card. By setting some spending limits for yourself each month and keeping track of where your money is going, it could be easier to know when to stop spending.
Pay off your balance in full each month. High-interest debt can cripple your financial future, so try to avoid it entirely by paying your statement balance every month.
Use an app. Apps like Debitize can help you essentially turn your credit card into a debit card. The tool connects to your credit card and checking accounts and deducts the amount of the transaction you make with your credit card from your checking account every da, and then pays your bill at the end of the month.
Since you can only use the amount you’ve loaded on your prepaid card, it can be easy to use it as a budgeting tool. For example, you can load a certain amount onto the card every week and force yourself to stay within that budget.
In addition, if you use the cash envelope budgeting system, you could use your prepaid card for some of the larger spending categories. For example, you could use cash for restaurants and entertainment and use your prepaid card for groceries and gas. That way you’re not carrying around hundreds of dollars in cash every day.
Lastly, some prepaid debit cards offer a way to spend as well as save using subaccounts, or separate accounts under your main account.
“A consumer can instruct the bank to automatically move money from the spend side to the subaccount on a regular basis,” Rust says. “It’s a great habit to set aside money for a rainy day, and this is a need that these subaccounts can fulfill.”
Advantages and disadvantages of prepaid debit cards
Prepaid debit cards have their purposes, but they’re not the perfect choice for everyone. To help you decide if they’re right for you, consider the pros and cons.
There are several prepaid cards out there with different features and perks, but they all come with the following three benefits.
Little risk of going into debt
The only way you can go into debt with a prepaid card is if you overdraw your account. At that point, you may be charged a fee, and you would owe the bank the amount you overdrew.
But remember, if a prepaid card offers overdraft protection, it’s usually optional. So as long as you don’t opt in when signing up, there’s no risk of spending more than you load onto the card.
No credit check
Since there’s no credit element to a prepaid debit card, there’s no need for a credit check. As a result, the major issuers of prepaid cards don’t run a hard inquiry on your credit reports (a hard inquiry has the potential to lower your credit scores).
This can be especially helpful if you’ve recently filed for bankruptcy or have other negative items on your credit reports that could decrease your chances of getting approved for a regular credit card.
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One of the perks of some prepaid cards is that you can create subaccounts for your family or other users. For example, you can set up subaccounts for your teenager or college student and set spending and ATM limits. You can also use the cards to pay allowances.
For some families, this can be a better setup than adding your children as an authorized user on your credit card or giving them access to a checking account, where you have fewer controls in place due to most credit cards not allowing you to set spending limits on authorized users.
Although prepaid cards have a lot of good features, they’re not a good fit for everyone. Here are the main drawbacks to consider.
Many prepaid debit cards come with a slew of fees, including monthly fees, ATM fees, cash reload fees, transaction fees and more.
Fortunately, some prepaid cards charge fewer fees than others (we’ll share a few later on). But if you don’t like the idea of paying for something that you could do for free with cash or a free checking account, a prepaid card might not be worth it.
No credit building
Since you’re not making payments as you would on a credit card or loan, there’s nothing for the prepaid card issuer to report to the consumer credit bureaus. If you want to build credit, consider using a secured or unsecured credit card instead.
With a checking account, your account is insured for up to $250,000 in deposits by the FDIC in case the bank fails. In contrast, not all prepaid cards offer the same protection.
There’s also no guarantee with some prepaid cards that you’ll be protected from fraudulent purchases the way you are with most credit cards and debit cards in the case of errors, loss or theft. The Consumer Financial Protection Bureau has finalized a new rule that requires fraud protection on prepaid cards (but it won’t go into effect until April 1, 2019). In the meantime, your card balance could be vulnerable.
How to choose the right prepaid debit card
As you’re shopping around for a prepaid card, it’s important to look at the fees and features for each card.
“A key step is to understand how you will use the card,” Rust says.
For example, if you only plan to add money to the prepaid card with direct deposit, it might not matter if the card you choose charges for cash reloads. Or if you plan to spend a lot, getting a prepaid card with cash back rewards can make up for the fees and even provide you some extra cash.
There’s no one-size-fits-all best prepaid debit card out there, so look at several to make sure there aren’t any features you’re missing out on.
If you’re wondering whether a prepaid debit card is right for you, there’s no right or wrong answer.
To help you make the right choice, consider your goal. If it’s to build credit, think about opting for a secured credit card instead. But if it’s to avoid the temptation of overspending, to get some help with budgeting or to use plastic without being tied to a bank account, a prepaid card might be a good option.
If you already have a prepaid debit card, take a second look at it to make sure it’s the right one for you. Compare it with some of the top prepaid cards to see if it measures up. The more time you spend finding the right one, the more value you could get out of the card in the long run.
The three American Express Serve® cards offer low fees, free ATM withdrawals and a variety of cardholder benefits to prepaid card users.
The Total Visa® Credit Card offers you a chance to build your credit without requiring a refundable security deposit. But before you apply, you should learn about its rates, fees and limitations.
Even if you have a limited or poor credit history, you may still qualify for easier approval credit cards like the Capital One® Secured MasterCard® or the Indigo® Platinum Mastercard®.