An estimated 23 million Americans use prepaid cards each month, according to data from the Pew Charitable Trusts. It’s not hard to see why. Prepaid cards can be a highly convenient way to manage your money. But before you start using one, it’s important to know exactly when it’s a good idea to use prepaid cards – and when it’s not.
When to use prepaid debit cards:
You don’t qualify for a traditional bank account. If you’ve opened and closed bank accounts often, or you have a history of incurring overdraft fees, it can be difficult to get approved for a checking account at traditional banks. For people with poor banking histories, a prepaid debit card can be a good alternative to store your money safely. Most prepaid cards are backed by FDIC insurance, like a traditional bank account. You can use them as freely as you would use a regular debit card, both online and in stores.
You want a simple way to control your spending. Because you can only spend as much as you deposit onto a prepaid debit card, they can be a good budgeting tool. For example, you could put $500 on a prepaid card each month for groceries. Once you hit your limit, you’ll have to wait till the next month to hit up the supermarket. Parents might also use prepaid cards as a tool to teach their kids how to budget. You can control how much your child receives on her card each month. Once the funds have dried up, that’s it.
You need a debit card to pay your bills online. Paying bills in cash can be a hassle. You’ll spend time and money driving to and from businesses if you’re paying each bill in person. Then there’s the extra postage cost if you’re mailing checks, not to mention the chance that a check could arrive late and result in a penalty charge. In this case, it might make more sense to use a prepaid debit card online to pay your bills each month.
You need your paycheck two days early. Some prepaid debit card issuers offer a pretty attractive perk: they will credit your account with your payroll earnings two days early. For example, if you’re paid on Fridays, your card issuer would deposit your earnings on Wednesday. Many prepaid debit card users find it difficult to stretch each paycheck to cover your household expenses. This feature could mean the difference between paying a bill on time or paying late and getting hit with an extra late fee.
When not to use prepaid cards:
You’re trying to build credit. Prepaid debit cards are not credit cards. That means your activity will not be reported to any major credit bureaus. So don’t expect your credit history to improve by using prepaid debit cards each month. If your credit is poor, one of the best ways to improve it is to sign up for a secured credit card (or credit building loan) through your local bank or credit union. MagnifyMoney keeps track of of the best secured credit card offers on the market today.
You can qualify for a low- or no-fee bank account. Prepaid debit cards often come with a host of fees that can make it much more expensive than a typical bank account. Some card issuers charge a fee every time you use the ATM, load funds on your card or need to replace a lost card, among a slew of others. Prepaid card companies are also notorious for hiding fees that they charge. In a recent study of 10 major prepaid card issuers by CreditCards.com, 7 out of 10 did not disclose fees as transparently they should.
While it’s true big banks do charge many fees of their own, there are plenty of low- or no-fee checking and savings accounts available today. These can cost far less in the long-run than a prepaid debit card.
You often cash your paycheck at check cashing storefronts. Cashing checks can be a pricey business, especially if you’re already having trouble making ends meet. On top of that, carrying around a lot of cash can leave you vulnerable to theft. Finding a low-fee prepaid debit card — if you are unable to qualify for a low- or no-fee bank account — can be a good alternative. Many prepaid debit card issuers even waive some fees if you have your paycheck deposited directly onto the card each time you’re paid. But you might think twice about carrying your entire paycheck on your prepaid card. RushCard and Green Dot, two of the largest prepaid card issuers in the industry, both had technical glitches in the last year that left customers unable to access their accounts.
You’re worried about identity theft online. Hyper-vigilant shoppers out there might use a prepaid debit card for online purchases. If your card number is stolen, the hackers can only access what’s on your card. But this would require the hassle of loading funds onto a separate card when you need cash, and many prepaid card issuers charge loading fees. Also, credit card fraud is a fairly innocuous threat to most consumers. Banks and credit card issuers almost always refund you any funds lost and send replacement cards free of charge. Some prepaid cards, as we noted above, charge for replacement cards.
Just to reiterate: Prepaid card fees can really hurt
The Consumer Financial Protection Bureau is working on new rules that would make prepaid card fees much more transparent. Until then, it’s unfortunately up to you to carefully review fees before signing up for a new card.
Just because your favorite celebrity has endorsed a certain prepaid card does not mean it’s right for you. Trust us — millionaire talk show hosts and musicians are pretty much the least likely prepaid debit card users out there. On the contrary, most prepaid card users are not high-earners. More than 80% of people who don’t have bank accounts and use prepaid cards earn less than $50,000 per year, according to Pew. When your funds are already tight, you need every penny you can get. Prepaid card fees can really hurt.
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