Guide to Prepaid Debit Cards

What Is a Prepaid Debit Card?

A prepaid debit card is much like a gift card: It allows you to spend whatever amount of money is stored on the card. You can reload the card online or at an ATM, a participating store, or another physical location when the balance is used up. Prepaid debit cards are issued by banks and they're branded by the major credit card companies, including Visa, MasterCard, Discover, and American Express.

Understanding Prepaid Debit Cards

A prepaid debit card is as good as cash and sometimes it's better.

• It is a safe way to carry money around, unlike a wad of paper money. Prepaid cards also come with certain consumer protections, but cash does not.
• A prepaid debit card can be used for online purchases.
• It can make a more attractive gift than cash.

Anyone who wants to stick to a strict budget or who has had trouble managing credit cards could consider using a prepaid debit card.

Some employers pay their workers with prepaid debit cards that are referred to as payroll cards. This can be useful if the person doesn't have a bank account or direct deposit. Many government benefits are also available via prepaid debit cards, including Social Security.

Prepaid Debit Cards vs. Regular Debit Cards

The amount of money you can spend with a regular debit card is tied to how much you have in the checking account it's linked to. You must have a bank account to use a regular debit card, but this isn't the case with a prepaid debit card.

The amount of money you have available to you will also fluctuate from day to day with a regular debit card as money moves in and out of your checking account. You have a fixed amount of money to spend with a prepaid debit card, which decreases as you spend and increases only if you reload the card.

The Downsides of Prepaid Debit Cards

Prepaid debit cards can come with an assortment of fees that will eat into your cash balance. These may include monthly fees, transaction fees, ATM fees, reloading fees, and foreign transaction fees. You may even be charged a fee for checking your balance on the card.

Employees have a legal right to decline being paid through a payroll card because the fees will reduce their take-home pay.

Shopping for a Prepaid Debit Card

Pay particular attention to the card's fees if you're shopping for a prepaid debit card. You'll also want to consider its convenience. How large of an ATM network will you have access to if the card is free to use at an ATM, as many of the best cards are? Is one of these ATMs close to where you live or work?

An Alternative to a Prepaid Debit Card

You might consider a secured credit card instead if the reason you want a prepaid debit card is that you have a bad credit history or no credit history at all so you're unable to get a conventional credit card. Secured cards are easier to qualify for because they require that you put down a refundable security deposit that serves as collateral for the lender.

The advantage of a secured credit card is that your monthly payments can be reported to the three major credit bureaus and help build your credit history. Debit cards, either prepaid or the regular kind, don't report transactions to the credit bureaus and will do nothing to improve your credit.

The Bottom Line

Prepaid debit cards come with both advantages and disadvantages. The interest and fees you'd pay on a regular credit card might be less than those charged by a prepaid card issuer, but you may not qualify for a credit card. A regular ATM debit card can be another choice if you have or are eligible for a checking account.

Otherwise, take your time to do some homework before you select a card for yourself or as a gift for someone else. Check out the issuer's track record and inquire about expiration dates, add-ons, and other issues. Compare this information to other prepaid card issuers so you're sure you're getting the best deal.