All that you should know about prepaid debit cards

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Contrary to the popular belief, debit cards and credit cards aren’t the only plastic cards you can use to make your online/off-line purchases. Prepaid debit cards have gained immense popularity over the past decade and are today used as one of the most productive tools for money management.

prepaid debit cards

While these cards once used to be the last resort for people who couldn’t qualify for a regular bank account, many new specialized features have moved them into the mainstream category. In fact, if we refer to the Nilson Report, the prepaid cards issued by the top 50 credit unions and US banks accounted for $ 118.09 billion spent at various merchant establishments in the year 2013 (a 6.1% jump from 2012). On the whole, the prepaid cards industry has grown tremendously over the past decade.

Let’s acquaint you with some more important facts related to these cards.

Prepaid debit cards – What are they?

A prepaid debit card is an excellent alternative to the conventional debit card. Just like MasterCard or Visa have their respective payment networks (where they’re readily accepted), you can use a prepaid debit card anywhere in its payment network. Some of the other common names used for prepaid cards are general-purpose reloadable card or pay-as-you-go card.

Please note, you’re essentially opening a transaction account in a bank whenever you get a prepaid card from a banking establishment, a retailer, a celebrity spokesperson, a credit card company or anyone else.

Unlike a debit card, which is connected to your bank account, a prepaid debit card can only be used for spending the money that’s loaded into the card account beforehand. You can use all sorts of options to load a prepaid debit card. Some of them can even be linked to your checking account/s and loaded via online transfers.

How are they different from the debit/credit cards?

Here’s how all these cards can be differentiated from each other:

Credit cards – These work on the ‘pay later’ principle, meaning that you borrow from the bank and pay later.

Debit cards – These work on the ‘pay now’ principle, implying that you use your money directly from your checking account whenever you make ATM withdrawals or purchases.

Prepaid debit cards – These cards work on the ‘pay before’ principle. You load a particular amount of money on to the prepaid debit card using your bank account, cash or check, and only then use the card for making any purchases, or ATM withdrawals.

Who are they ideal for?

These cards are ideal for everyone whether they have a bank account or not. As per government statistics, as many as 10 million American households don’t even have a single bank account. A prepaid debit card can serve as an excellent solution for these households who although may want a credit card or bank account, can’t get it for some reason.

All the people who have active bank accounts can use prepaid debit cards as excellent tools for sticking to their monthly budgets, without ever overdrawing their checking accounts.

These cards can also be the ideal payment solution for visiting relatives from other countries, teenagers receiving allowances and people living on fixed incomes.

Some commonly known features of prepaid debit cards

Although the new age prepaid debit cards can differ tremendously in terms of their features, a large majority of them have some basic features that are common to all of them. These are:

ATM access – A good number of prepaid debit cards come with free access to ATM networks like Allpoint and Moneypass, that are spread all over the United States. Other prepaid debit cards issued by the banking establishments get automatic access to the nationwide bank ATM networks.

Expiry date – All prepaid cards come with an expiry date and hence it becomes extremely important to ascertain if the issuer will reissue the card upon its expiry. A recently released Consumer Financial Protection Bureau report revealed that many customers are never reissued their prepaid debit cards (after expiry) despite having balances on them.

Various fees – All prepaid debit cards have their own respective deposit fee, card activation fee and fee applicable on the card usage at out-of-network ATMs. Many of them have a monthly fee that can be waived through direct deposits. Some prepaid debit cards apply a fee every time the card is used at an ATM or for some purchase.

Fraud protection – One of the ways in which prepaid debit cards differ from the regular debit cards is that the former don’t have any fraud or liability protection, as mandated by the Federal law in case of the latter. While some of these cards come with purchase protections, you may have a difficult time trying to correct any errors or disputing unauthorized charges. However, an important safeguard available in majority of these cards is the Federal deposit insurance, covering the card holders for their money balances in the event of the issuer going bankrupt.

Reloading options – You can normally add money to your prepaid debit card using several different methods including check deposits at ATMs, direct deposits and cash loading at the participating retailers. Some card issuers even allow cardholders make check deposits and transfers from their mobile phones.

Reloading and withdrawal limits – Some prepaid debit cards put restrictions on the amount you can load or withdraw to/from the card in a certain given period.

Miscellaneous features – Some prepaid debit card issuers even provide multiple copies of a debit card to the card holder’s family members. Some can be used for making online bill payments and writing checks too. A select few take these cards to another level by offering cashback rewards, just like the common rewards credit cards.

Some drawbacks

  • You can’t use them to build your credit score.
  • They lack several features normally available with the checking accounts and their corresponding debit cards.
  • Although a select few prepaid debit cards offer cashback rewards too, you can never earn the kind of rewards with them as you can with some of the best rewards credit cards.
  • Your choices are often limited in terms of the ATMs you can use.