What is a Prepaid Card?

If you don’t have an online bank account or credit card and want an easy way to limit overspending, a prepaid card may be your best bet. Millions of Americans are using them to supplement or replace traditional banking services.

Yet, prepaid cards also have their drawbacks.

Here’s the scoop on prepaid debit cards. This way, you’ll be in the know when it comes to making the best choices for your finances and goals.

What is a prepaid debit card?

A prepaid debit card is exactly what it sounds like. It is an alternative banking card that only lets you spend the money that you have preloaded onto the card. You can use your prepaid card anywhere that accepts its payment network, such as Mastercard or Visa. If you attempt a purchase beyond the funds available, your card is simply declined.

When you’ve exhausted the funds on your card, companies offer you multiple ways to add more money. Depending on the provider, you can add cash via a transfer, direct deposit or cash.

Unlike a traditional debit or credit card, a prepaid card requires that you pay before you go to make a purchase. You do this by loading up your card with cash ahead of time. A debit card, on the other hand, charges you immediately after you make a purchase by deducting that amount from your bank account. And, a credit card doesn’t require you to pay until after you buy something – whenever your next bill is due or over time (you’ll typically incur interest if you don’t pay off your entire balance that month).

Who can benefit from a prepaid card?

Prepaid cards are easy to get and very useful if you’re prone to overspending. You can qualify for a prepaid card regardless of your credit history. And, they are helpful if you’re trying to avoid debt.

Because of these benefits, these cards are often a good option if you don’t have access to a credit card or you’re trying to budget using mainly cash. At the same time, a pin-protected prepaid card is safer than carrying cash. Prepaid cards can also be helpful if you don’t have access to a bank account. With this said, keep in mind that with the rise of challenger banks, more people can now get bank accounts.

What are the disadvantages of prepaid debit cards?

While many turn to prepaid cards for convenience, these cards have some significant limitations. In fact, prepaid cards have a bit of a bad rap and the Consumer Financial Protection Bureau will be rolling out new regulations for prepaid cards in May of 2019.

The most important disadvantage is that prepaid cards charge a lot of fees. For example, you’ll often be charged fees for an initial setup, monthly maintenance, reloading your card, ATM use, and more. Studies have shown average prepaid cardholder fees total $11.00 per month.

If you have bad credit, keep in mind that these cards also won’t help you rebuild your credit. And, you won’t have access to banking services or the ability to stop payments. Also, prepaid cards don’t offer fraud protection like a typical debit or credit card. If your card is stolen, there is no requirement for the issuer to replace the funds. Even with the roll-out of the new CFPB rules next year, prepaid cards that aren’t registered with your name and personal information won’t be required to offer this protection.   Banking options such as Chime provide a great alternative to prepaid cards and allow you to open a bank account with bad credit and require no deposit. 

What are the best alternatives to a prepaid debit card?

If you are turning to a prepaid card because you’re having trouble getting a credit card, want to avoid credit card interest and don’t want to ever pay overdraft fees, you do have other options.

First off, consider an online bank account such as Chime. Chime is a mobile bank account with no hidden fees. You’ll receive a debit card with free access to over 30,000 ATMs. With Chime, you can get paid up to two days early with direct deposit. You’ll also be able to use your card at any merchant where Visa is accepted. With no minimum balance requirements, overdraft fees, or monthly fees, you can get the benefits and protections of a bank without all the costs.

Secondly, if you want to build credit, consider a secured credit card as a stepping stone. These cards help establish or rebuild credit history without living beyond your means. The amount of cash you deposit as collateral becomes your credit limit. For example, if you put $500 on a secured credit card, that’s how much you can spend. It differs from a prepaid card as your charges don’t draw directly on your cash deposit, but on a credit line that you need to pay off regularly.

Bottom line

Whether you’re considering a prepaid card as a budgeting tool or alternative way to bank, be sure to dig into all the fees before choosing a card. And remember: prepaid cards can be expensive to use, so you’ll want to know the costs before committing to a card.

Banking Services provided by The Bancorp Bank, Member FDIC. The Chime Visa® Debit Card is issued by The Bancorp Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit cards are accepted. Chime and The Bancorp Bank, neither endorse nor guarantee any of the information, recommendations, optional programs, products, or services advertised, offered by, or made available through the external website ("Products and Services") and disclaim any liability for any failure of the Products and Services.

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