Prepaid debit cards – When should you use them and when not

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While a conventional debit card is linked directly to your checking account, a prepaid debit card needs to be loaded with the required amount of funds, for it to be used at various online/offline merchant establishments. Going by the statistics revealed by Pew Charitable Trusts, as many as 23 million US citizens make regular use of prepaid debit cards every month. It doesn’t come as a surprise because these cards offer a very convenient method of managing one’s money. However, before you go online to sign up for one, you must know exactly when you should and should not use these cards. Let’s find out.

prepaid debit card

You should use a prepaid debit card if:

All you need is a debit card for making online bill payments

Making monthly bill payments in cash can be a very troublesome affair sometimes. You need to take out time and money to drive down to the particular establishment and often wait in a queue to make the payment. You can’t mail your check either as a penalty charge may be levied if your check arrives late due to some reason. The best alternative in this scenario is a prepaid debit card, especially if you don’t want to use your regular debit/credit card for some reason.

You not eligible for a conventional banking account

If you’re someone who has opened and closed many bank accounts in the past, or have often incurred overdraft fees, you may find it hard to get a checking account at any of the conventional banking establishments. A prepaid debit card works like a godsend for people who have poor banking histories. What more, a large majority of these cards have FDIC insurance backing, just like the regular bank accounts! Furthermore, these prepaid debit cards can be used as freely as the regular debit cards both for in-store and online payments.

You want your paycheck a little early

Some of the prepaid debit card issuing companies offer their card holders a very attractive perk – they credit these card holders’ accounts with their payroll earnings two days in advance. So, if you’re normally paid on Saturdays, the card issuer may credit your earnings by Thursdays. As a large majority of us face difficulties in stretching our paychecks to meet our regular household expenses every week/month, such a feature can become the difference between being penalized for late payment and paying a bill before time.

You need a simple method for controlling your spending

One of the main features of the prepaid debit cards is that you can spend only as much as you load into them. This can be used as an excellent method for controlling your spending habits. So, if you preload your debit card with $ 400 for groceries each month, you’d need to wait until the next payment if you exhaust your limit before time. It can also function as a motivator to curb your spending instincts. In fact, these cards are often used by parents to teach their kids about budgeting skills. They preload these cards with a particular allowance amount each month and once those funds are exhausted, the kids need to wait until the next allowance date for a reload.

You shouldn’t use a prepaid debit card if:

You are eligible for a zero fee or low fee bank account

These cards normally feature many different fees that make them more expensive compared to the conventional bank accounts. A good majority of prepaid debit card issuers charge the card holders a certain fee every time funds are loaded onto the card, an ATM is used, a card replacement is requested and more. Many a times there are hidden charges that the card holders have no knowledge about. A recently carried out study on 10 prominent prepaid debit card issuers revealed that 7 of them weren’t as transparent as expected regarding their fee structures and disclosures.

Even though big banking establishments have their own fee structures, you can always opt for zero-fee or low-fee checking or savings accounts. Such accounts can be far less expensive than any of the prepaid debit cards in the longer run.

You’re working towards building a healthy credit score

Prepaid debit cards are simply a modified version of the regular debit cards that work on the ‘pay before’ principle (unlike ‘pay now’ of debit cards). They come nowhere closer to credit cards when it comes to their utility in building a healthy credit score. None of the activities carried out on prepaid debit cards are reported to any of the credit bureaus. Hence, you can’t expect these cards to improve your credit history in any way. If you’re keen on building your credit score, the best way to go about it is signing up for a credit building loan or a secured credit card via some credit union or bank.

You’re used to cashing your paycheck regularly at the check-cashing store fronts

It can be a very expensive affair to cash your checks, especially if you’re already living a hand-to-mouth existence. Carrying plenty of cash can be a very risky proposition on the other hand. Opting for a prepaid debit card (in case you don’t qualify for a bank account) can work out as an excellent alternative in such situations. A large number of prepaid debit card issuers are in fact overgenerous to people opting for direct deposition of their paychecks into the cards, in the manner that many of their card-related fees are waived readily.

However, you might like to think twice about depositing your entire paycheck into your prepaid card. Both Greendot and RushCard, two highly popular prepaid debit card issuers faced major technical glitches in their systems last year, leading to a lot of account access problems for the card holders.

You need card replacements a little too often

You may want to look at other feasible alternatives if you’re someone who loses his/her cards pretty often. While credit card issuers and banking establishments almost always refund any funds lost due to such misplacements, there’s no such facility available in case of prepaid debit cards. In fact, you may be charged for a replacement if you end up losing/misplacing your prepaid debit card.



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