Prepaid debit cards can be used to buy things online and in person. They may be a helpful budgeting tool, and they don’t affect your credit.
And with new regulations, you may be able to recover your money even if you lose the card. There are advantages and disadvantages to using prepaid debit cards. Read on for more information.
What is a Prepaid Debit Card?
A prepaid debit card shares some features of a credit card, debit card, and gift card. It is a debit card that’s been pre-loaded with money, that you can generally use at any retailer (online or in person) that accepts credit cards.
Like credit cards, prepaid debit cards may be associated with credit card networks. So a prepaid Visa debit card, for instance, can be used anywhere that accepts Visa.
Each purchase you make on a prepaid debit card will deduct from the money that’s been pre-loaded, and when you reach the end of your pre-loaded cash, you can’t buy anything else with the card.
A prepaid debit card isn’t linked to your checking account; you can only access the cash that you have preloaded to the card. It’s usually possible to add more money to the card when the balance gets low or via direct deposit, depending on the card. Depending on the card, there may be a fee to reload the card with money.
Pros of Prepaid Debit Cards
Like most financial products, there are pros and cons to consider when it comes to using prepaid debit cards. Here are a few of the plus sides worth reviewing.
No interest or bills
A prepaid debit card is not a credit card, and you can’t carry a balance on it. Hence, there is no interest charged on anything you charge to the card, and there is no bill at the end of the month. A prepaid debit card is basically the plastic equivalent of cash.
It used to be that losing a prepaid debit card was like losing cash—you were out of luck. But legislation by the Consumer Financial Protection Bureau (CFPB) took effect in 2019 that required card issuers to provide protection against fraud and errors. In order to access this protection, you must generally follow instructions to register your card with the prepaid card issuer and report any theft or loss promptly.
Security for Personal Information
Prepaid debit cards don’t typically contain any of your personal and financial information, so if your card falls into the wrong hands, it’s generally not possible for someone to access your sensitive information.
Prepaid debit cards offer a hard stop on spending, meaning that if there’s $100 on the card, you can’t spend more than $100.
For people who have a hard time with impulse purchases or who are trying to stick to a strict budget, prepaid debit cards may provide a helpful tool to prevent them from exceeding their spending limits.
There are some prepaid cards that allow account holders to overdraft and may charge a fee for this. If going over the limit is a problem for you, it may be worth considering a card that doesn’t allow overdrafting.
Available to those with less-than-stellar credit
There is no credit check required to get a prepaid debit card. This makes prepaid debit cards one option to consider for those who are unable to qualify for a traditional credit card.
If your credit is sub-par, you can still carry a prepaid debit card in your wallet and use it where major credit cards are accepted.
Those with children may find that prepaid debit cards could be a good tool to have in your portfolio.
Prepaid debit cards could be used to introduce concepts of spending within limits, to help children understand using plastic instead of cash, or to dole out allowances so kids can practice their money management skills.
Some cards offer email or text alerts based on card activity, or will notify you when the card has been reloaded or when the account balance is getting low. This could help you keep an eye on what you or your child is spending on the card.
Possible to deposit paychecks
You can have funds (like paychecks) directly deposited to some cards, skipping the need to manually reload the card as the balance runs low. This could mean that funds are available faster than they would be if you were cashing a paper check.
Cons of Prepaid Debit Cards
Here are a few downsides to consider when it comes to prepaid debit cards.
No credit effect
Although it’s nice that there’s no credit check required to get these cards, prepaid debit cards aren’t connected to a line of credit like credit cards are.
This means that the company that administers the prepaid debit card is not reporting your payment activity to the credit bureaus, so these cards aren’t helpful for establishing or strengthening your credit history.
Depending on the card, a prepaid credit card may come with a host of attached fees. Some prepaid cards may charge fees for activities like the following:
• Activating the card
• Making a purchase
• Adding money to the card
• Checking your balance on the card
• Withdrawing money at an ATM
• Replacing a lost card
• Foreign transaction fees
• Inactivity after a period of time with no transactions
Those considering using a prepaid debit card may want to look around and review the costs and fees associated with different types of prepaid debit cards. The CFPB regulations that took effect in 2019 also included rules for fee disclosures.
While this is being phased in over time, prepaid credit card providers will be required to include a chart that details key fees and other relevant information so that consumers can effectively compare different prepaid debit cards.
Potential for loss
If you don’t register your prepaid card and something happens to it—loss, theft or fraud—there may be no way to recover your cash.
Getting a Prepaid Debit Card
You can purchase prepaid debit cards at a variety of locations including grocery stores and drug stores, online, or from some banks or credit unions.
Purchasing a prepaid debit card usually requires you to load money onto the card at the time you buy it. For example, if you want to buy a $50 prepaid Visa debit card at the drugstore, you would pay the fee to activate the card, plus the $50 you want to load onto it.
If you’re shopping for cards, pay attention to the card fees, which should be displayed on the card’s packaging. There may also be a toll-free number or website you can visit for complete fee information. To the extent possible, it’s worth trying to find prepaid debit cards with fewer fees to prevent fees from eating into your cash balance.
After purchasing the card, if you want to be protected against fraud, loss or theft of your card, you’ll usually need to register it.
The prepaid card will generally come with instructions for doing this, and the card provider may request information such as your full name, contact information, date of birth and Social Security number or tax ID.
Managing Your Money
Sticking to a budget and managing your cash flow can be daunting. There are many different types of deposit accounts, so it is important to understand the value each offers. Balancing your income against your expenses and savings goals takes dedication and commitment to a tidy financial life.
The right tools can make it easier. If you’re looking for an alternative to a prepaid debit card, one option to consider is SoFi Money®.
A SoFi Money cash management account allows users to streamline their money management since they can save and spend in one place.
The account comes with no account fees and the opportunity to earn cash back rewards (subject to change). Account holders can also use the Vaults feature to track different savings goals.
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