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Is a Prepaid Debit Card a Good Choice for You?

 

It’s a tough question and you need to get your facts straight before you make a decision to use a prepaid debit card. Before we dig into the pluses and minuses of a prepaid debit card, let’s first make sure that we all know what one is. Over the last few years, prepaid debit cards exploded onto the personal finance scene. Celebrities, banks, retail stores, colleges, and even banks are offering the convenient cards to consumers as an alternative to credit cards and traditional debit cards tied to checking accounts. The card service allows you to “load” a card with your own money and spend that money freely. Anyplace that accepts traditional credit cards such as Visa and Master Card will accept a prepaid debit card; at ATMs, online, in-store, and over the phone. No checking account or credit check is required. Simply order the card online, pick one up at your local retailer or many financial institutions are also offering them.

 

So, what is the catch? What should you know about pre-paid debit cards?

It’s all about the fees. Not all cards are created equal and each card comes with its own set of fees that you need to be aware of. Here is a partial list of fees that are commonly charged by prepaid debit card providers:

  • Activation Fee: The cost of activating the card so that you can load it with your money and begin to use the card.
    Monthly Fee: The cost of simply having the activated card in your wallet.
  • Balance Inquiry Fee: The cost of asking for your balance at an ATM.
  • ATM Fee: The cost of withdrawing your money from an ATM.
  • Reloading Fee: The cost of loading the card with money.
  • Paper Statement Fee: The cost of obtaining a paper statement of your card activity.
  • Purchase Transaction Fee: The cost of actually using your prepaid debit card in either a PIN or signature transaction.
  • Customer Service Fee: The cost of calling your card’s customer service department.
  • Inactivity Fee: The cost of not using your card often enough.
  • Declined transaction Fee: The cost of having your transaction declined due to lack of funds in your card’s account.
  • Minimum Balance Fee: The cost of not maintaining a minimum balance in your card’s account.
  • Check Fee: The cost of having the card service provider issue a check on your behalf.

Not all of these fees are charged by all prepaid debit card providers and the amount of each fee can vary widely. For instance the monthly fee may range in cost from $1.50 to $15.00. Some fees may even be waived if you use the card often enough or load your card via direct deposit or in a store. The trick is to know which fees you are facing and to balance the cost of those fees against the cost of a traditional checking account. The total amount of the fees you will be charged will be determined by the card you choose and your own personal finance habits. You also need to know that not all of the fees are listed on the card’s packaging. You will need to visit the website of the card provider to get a more comprehensive list of the fees that you could be charged.

It’s not about building a credit history. Let’s be perfectly clear. Prepaid debit cards DO NOT affect your credit score in any way. This is because you are spending your own money. Your credit score is based upon your ability to manage money that you borrow. Some cards tell you that they report your activity to a credit bureau. However, that data is not used to generate your credit score.

What about controlling my spending? It is true that prepaid debit cards limit your spending to the amount of money that you have loaded onto the card? This in turn means that you are not charged overdraft fees due to over spending. However, opting out of overdraft protection at your bank would provide the same end result.

Is the money loaded onto a prepaid debit card protected? The answer is maybe. Currently, there are no regulations governing prepaid debit cards. If your card is lost or stolen, any protection provided by the card issuer is strictly voluntary and can vary between one card provider and another. Be sure to understand the protection policies that come with your card.

Do prepaid debit cards protect your identity? Yes, they do. Your personal information is not connected in any way to a prepaid debit card. If the card information is stolen, your personal information is safe from harm. Some people obtain prepaid debit cards for the sole purpose of making online purchases.

What is the bottom line? When is a prepaid debit card the right solution?
Prepaid debit cards are a good solution for those who cannot obtain a traditional checking debit card through a bank or credit union. In most cases, the fees you will be charged with a checking account will be lower than the fees charged by a prepaid debit card provider. However, if you regularly overdraw your checking account and are being charged excessive overdraft fees, having a prepaid debit card might be a good way for you to correct your bad habits and rein in those checking costs.

Be careful, do your research and make an honest assessment of your personal finance habits. If you think a prepaid debit card is the way you need to go, then make sure you find one that will suit your spending habits and will result in the least amount of fees possible.



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