For those who have difficulty getting approved for a credit card, or those who are looking to pay down some larger debts, having a pre-paid debit card may be a great solution. Instead of having a credit card company determine how much money you can spend, you are limited by how much money you load onto the pre-paid debit card.
A pre-paid debit card requires no credit check, has no interest, has no late fees and will not allow you to go over your spending limit. One of the main differences between a credit card and a pre-paid debit card is that the credit cards usually have no monthly fees, but a pre-paid debit card typically will.
Why the Sudden Increase in Pre-Paid Debit Cards?
There are several main reasons why pre-paid debit cards are becoming increasingly popular. One of the biggest reasons is that it is becoming more and more difficult for consumers to be approved for credit cards, as most banks are using more stringent credit criteria before issuing a credit account. For those with patchy credit histories or poor spending patterns, or for those with large debt to income ratios, a pre-paid debit card is a simple solution—with no credit check, you can simply pick one up at Walmart or even the grocery store, and start using it as soon as you deposit some money into the account.
For some, using a credit card to make every purchase has become a habit. Many use their credit cards, particularly those with rewards points or cash back programs, as a way to pay for everyday expenses. This works out very well for those who pay their bill in full each month, therefore accruing no interest charges or late fees. Unfortunately, for some this led to living beyond their means, and often overspending, with the plan of paying it off “next month” or “when I get my tax return” or some other time in the future. In doing so, balances gradually add up to an amount that is very difficult to pay off—even impossible, in some cases. In recent years, more people have found themselves in hot water with credit card companies because their spending simply got out of control. So, with no interest fees or late charges, and no way to spend more than you have deposited on the card, it is easier to stay within a budget and keep spending at a reasonable limit.
Limit Bank Fees
With many banks imposing fees for having checking accounts that come with debit cards, a pre-paid debit card can be a low cost solution. Banks are making less profit on loans and credit cards with the lower interest fees over the past several years, and trying to recoup their costs by charging more for regular banking services like checking accounts. You can find pre-paid debit cards with fees that range from zero to about $9.95 per month.
Many of the pre-paid debit cards also offer direct deposit options, so you can use them in lieu of a checking account, and have your paycheck directly deposited onto the card, bypassing the traditional checking account. At many banks, there is a charge to open the account (up to $25 in some cases), with a range of monthly fees from zero to about $10, typically depending on the balance you maintain and whether or not you take advantage of direct deposit options or other features available (e.g., additional savings account, CDs, loans, etc.). In most cases, the pre-paid debit cards may be a less expensive option and you can save yourself hundreds in fees annually.
Because most pre-paid debit cards are accepted anywhere that a traditional Mastercard or Visa is accepted, you won’t have to worry about keeping cash on hand. However, you can still withdraw cash from many automated teller machines (ATMs) just as you would with any other debit card. Reloading money onto the card is simple, and can be done online or at many retail locations.
Although pre-paid debit cards are still less popular than traditional credit cards, they are certainly becoming an attractive option, and it is likely that the trend toward pre-paid over credit will continue to grow. More people are turning toward limiting their credit spending to keep costs low or to avoid further credit problems if they have already demonstrated difficulty with staying within certain limits.
A Better Alternative
There are two major downsides to pre-paid debit cards:
1. They don’t report to the credit bureaus.
There is little pay-off for your responsible spending because you aren’t helping your credit. If you have limited or bad credit, getting a secured credit card would be more beneficial in the long run, as it would report your positive payment history to the major credit bureaus frequently and thus improve your credit score.
2. No Rewards
Again, very little pay-off here. With so many cards offering rewards for credit card spending, it seems like a loss to use plastic and not earn any rewards. While most secured credit cards don’t offer rewards either, they’ll get you on the road to approval for cards that do.
Credit cards still have the advantage over pre-paid, for the right customers. That said, for those who can’t responsibly make payments, sticking with pre-paid cards is the wise choice.
Those with great credit will continue to obtain credit cards that offer great rewards or cash back options, so we know rewards credit cards aren’t going anywhere. But because of the reasons mentioned above, our hunch is that pre-paid options are sticking around too.