Prepaid Debit Cards
Prepaid cards or debit cards are the perfect alternative to cash for those with poor credit or no credit. These cards are typically reloadable and can only be used up to the amount that you have deposited into your associated debit or checking account. Not only do these cards offer you convenience as something you can use in lieu of cash, but they also prevent you from overspending. Your credit limit is tied to how much you've deposited into your debit account.
Prepaid Debit Card Tips & Facts
Prepaid cards function somewhat like debit cards: hence they're given the name "prepaid credit" or "prepaid debit" cards. They work by having the cardholder deposit some funds into an account -- funds which can then be drawn against when the card is used. They can be a way for teens, students, and other spenders to learn money management skills without having to juggle cash (or lose it, as is often the case for some folks). You're limited to spending only up to the amount you put into your prepaid card account.
Before you choose to pick up a prepaid debit card, there are a few things you should know.
- Prepaid debit cards are not true credit cards. A prepaid debit card may look a lot like a credit card, but in truth, it is much more like a debit or check card issued by your local bank. Prepaid cards require you to fund an account from which you can draw from, when you make transactions. You dip into your prepaid debit account much like how you'd use a checking account, instead of using a line of credit.
- Prepaid debit cards offer an alternative to banks. After the credit crisis of 2007, millions of Americans turned their backs on the U.S. banking system. Prepaid debit cards make ditching the bank a much more convenient option. These cards allow individuals to make online payments, rent cars, book hotel rooms and buy airline tickets with the ease of a credit or bank account affiliated debit card, without the hassle of maintaining a bank account. This is also a viable option for people who cannot open a bank account due to past banking issues.
- Prepaid debit cards do not require credit checks. Since you are funding the card with your own money, there is no need for the issuer to check your credit, therefore making such cards extremely attractive to customers with no credit or with bad or fair credit. Of course, having a prepaid card won’t help nor hurt your credit, since these accounts are generally not reported to any of the three major credit bureaus.
- Adding money is easy. Since the emergence of the prepaid debit reloadable card, more and more retailers and other outlets have made reloading these cards extremely easy. You can reload at a retail location, transfer money from your bank account, Paypal, or via direct deposit from your employer, or wire money to your account through services like Western Union.
- There may be fees to pay. Although these cards can be a convenience, you should watch out for fees and charges before signing up. While traditional credit cards make money through charging you interest, prepaid debit cards choose the more direct, fee-driven method. Prepaid debit card issuers will usually charge you a monthly account maintenance fee, or possibly an annual fee, ATM fees, a reload fee and a few other transactional based fees for the convenience of carrying the card. Another charge you might run into is an application or activation fee. Be sure to compare these cards before you settle on one, since not all cards (and therefore fees) are created equal. You'll notice from our list above, that many cards are described as "low fee", but you'll need to check the details of these cards carefully to see how their issuers earn from their customers.
- Prepaid debit cards offer customers without traditional bank accounts an easier way to track payments and to know just where their money goes. Online banking is the new wave when it comes to tracking your money every month, but individuals without access to online banking don’t have to worry. Most prepaid debit cards or credit cards come with a website that customers can use to view transactions, balances, and other aspects of their accounts, making money management possible.
- Prepaid cards offer buyer protection. Just like any other Visa or MasterCard branded product, you can be sure that you are protected from theft and unauthorized usage. Not only are you protected by Visa or MasterCard, but also by the FDIC, up to $250,000, thanks to the bank issued debit card like qualities of the account.
- Prepaid debit cards are also available through many retailers now -- you can buy them in certain denominations and use them like gift cards or prepaid phone cards. Supposedly, prepaid cards have become popular in part because consumers want to avoid overdraft fees on their checking accounts, which can be as high as $35 each instance. Weigh the costs for the different options you are considering.
{ 11 comments… read them below or add one }
What I like about debit cards is that they allow you to make purchases in many places where regular credit cards are accepted but you have the advantage of not needing to borrow money or having to carry a balance like you would a regular old credit card. But remember that you would need to fund a prepaid card before you can use it since these cards don’t extend you a credit line. Loadable cards allow customers to spend cash with the convenience of plastic.
Absolutely. These cards let customers load and reload cash into an account that you can access easily. You can then make secure online purchases without accumulating debt. The best thing about these cards is the no interest feature because there are no revolving balances. Instead of utilizing a line of credit to make purchases, customers are using their own money. I also believe that debit cards are much safer than using cash because you are protected from unauthorized transactions and loss of funds due to theft or loss of the card under consumer protection regulations.
Note that ordinary debit cards are typically linked to your bank account and aren’t intended to help you build credit. On the other hand, prepaid cards are reloadable cards with their own accounts and may, in some cases, be used to help you establish credit.
On your last point on ordinary debit cards vs reloadable cards…
Help me get my mind around this. What, exactly, would get reported to the credit bureau? If you buy one of these at Wal-Mart, for example, the issuer wouldn’t even know who you are, correct? I could pay cash at Wal-Mart, go next door to Barnes and Noble, use the card to pay for my purchase, and walk out the door – completely off the grid.
Even if the issuer does have my indentifying information, what is there to report? There’s really no concept of a bill that is “due”, since it’s a pay up-front concept.
You’re not the first person to say that these cards can help build credit, so I’m wondering if I’m missing a key fact.
There are some prepaid cards that may also offer a “credit builder” feature. Take for instance the “Account Now” prepaid cards. Their application page also references a “free credit builder” feature and the possibility of applying for and receiving a line of credit. Check out the Account Now cards on the list above.
Ah.
PRBC is a bit different than the other credit bureaus. I was thinking that the prepaid card activity was somehow being sent to the 3 main bureaus, and I was struggling with that concept.
The line of credit is just a loan, of course, so it makes sense that this activity would be reported to all bureaus.
@Kosmo,
I guess with prepaid cards you are given a “test” of what happens with using a card. I look upon them as a transitional step to moving to regular credit cards. Interesting that there are credit bureaus beyond just the three main ones.
Prepaid Visa cards are great for online shopping safety as well. Obviously, I would say that the general consensus is that it’s now safe to use your cards on well known sites, like Amazon etc. But for those of us, like myself, who hate the idea of using a card associated with a bank account on any smaller, lesser known website, then using a prepaid card is a good backup plan. In the UK, the mobile phone provider, O2, has one and I know that Paypal has one too. If you can just apply the amount you are going to spend, you have less to worry about in terms of security online.
I know so many people who have had bank account problems relating to online fraud, that I will personally onlyuse a card associated with my bank account on few shopping sites – and always the bigger, well known ones.
I’ve seen so many pre-paid credit cards recently. At first I was wary because they only seemed to be offered by unknown companies, but now larger, well-known companies have started offering them so I’ve been wondering if they are a good idea.
One of the best prepaid cards I have seen is the new Mango card with no fees if you load $500 a month. With the coming changes in credit card law that will limit students who do not have a job, and with parents having to co-signature these cards, these types of cards are sure to become very popular with parents and students alike. They are also great for online shopping and work anywhere MasterCard is accepted.
Lots of people go nuts trying to get credit. Whatever you do, just make sure you use a card as an effective financial tool that can help you instead of hinder you.
Please note that as of this date, the credit builder, iadvance or PRBC features of Account Now prepaid cards are no longer supported. Information on these features that we mention here are currently for historical and educational purposes only.