Banking 101: What to Look for in Prepaid Debit Cards

You may not know it, but 8.4 million households in the United States are unbanked. An additional 24.2 million American households are underbanked, meaning they have obtained financial products and services (beyond a checking or savings account) outside of the banking system.

But these aren’t just statistics; they are people who really need a way to pay. You might understand the struggles that many consumers go through to obtain a bank account. For the unbanked or underbanked, a prepaid debit card could be the only option available for making card payments. Luckily, you don’t need a bank account to get a prepaid card.

Ken Tumin, founder of DepositAccounts.com, sees prepaid debit cards as a good alternative for people who can’t access checking accounts or bank accounts, or for those who have credit issues that prevent them from getting credit cards. “With a prepaid debit card, people can make purchases without cash. It gives them a lot of the functionality of a checking account,” said Tumin.

Before you start using a prepaid card, it’s important to consider how they work, where to get one and what your alternative options are.

How prepaid debit cards work

Let’s get the basics down before you decide whether a prepaid card is a good fit for you. A prepaid debit card is a payment card that can be used to make purchases and withdraw cash from ATMs, but is not linked to either a bank checking account or to a credit union share draft account. Instead, you add money to a prepaid card in advance of making purchases. This process can be referred to as “loading money onto the card.”

One of the perks of using a prepaid card is that you can’t overspend. You can only use as much money as is already loaded onto the card. This feature helps you manage your money and avoid overdraft fees.

• How do you get prepaid debit cards?

Generally, you can buy a prepaid card at retail locations like a grocery store or a drug store. You can also buy them online or over the phone. Some banks and credit unions may offer them as well.

• How do you add money to prepaid debit cards?

There are a few options for adding money to your prepaid card. Depending on the card provider, you may be able to arrange for direct deposit to the card. You can arrange to have your paycheck directly deposited onto a prepaid debit card. You can usually transfer money from a checking account to the card. You might be able to purchase what is referred to as a “reload pack” to add more money to your card, or add funds at retail chains like drug stores, Walmart or 7-Eleven.

• How do you use prepaid debit cards?

Similar to the process of making a purchase with a credit card or debit card, you swipe, insert or tap a prepaid card at a point-of-sale to pay for things. It has a very similar appearance to a debit or a credit card.

• Where can you use them?

Prepaid debit cards are popular because you can use them to make purchases in stores, or online, and to get cash from an ATM. You can use a prepaid card anywhere you use a debit card or credit card, as they use the same payment networks, run by Visa, Mastercard and American Express.

4 things to know about prepaid debit cards

Now that you know the basics about how a prepaid card works, it’s time to consider some of the good — and not so good — aspects of having one. Your unique financial needs may be the right fit for a prepaid debit card, or it could be a misstep for you. Consider the following factors:

You could be charged fees

Issuers charge prepaid card users a variety of fees:

• Monthly fees: A prepaid card monthly fee is fixed and paid every month, even if you don’t use your card that month. It is possible for the monthly fee to be waived in some circumstances, and there are some cards that do not carry a monthly fee.
• Transaction fees: Some cards charge transaction fees each time you make certain types of transactions, such as online or in-store purchases. Some cards may allow you to choose to pay a single monthly transaction fee.
• Decline fees: Although less common, a decline fee can be charged if you attempt to use your card for a purchase that is larger than your available balance.
• Inactivity fees: You may be charged this fee if you don’t use your card for a specified period of time. Not all cards charge these fees, and the length of inactivity that triggers the fee varies.
• Cash reload fees: This is a fee you may be charged if you add money to your card at a retail location. The retail location is who would charge the fee. Most prepaid cards offer free options to load money onto a prepaid card.
• Foreign transaction fees: This fee is charged by your card provider when you use your card to make a purchase in a foreign country or currency.

You won’t build your credit score or credit history

One of the benefits of a prepaid debit card is that you don’t need to have a high credit score to qualify for one. Since you’re not borrowing money, but spending your own, you don’t need to prove you are likely to repay your debts.

Your credit score won’t be considered when you apply for a prepaid card, and your credit score won’t be affected by how you use the card. Most prepaid debit cards won’t help you build a stronger credit history. While you won’t build your credit using a prepaid debit card, you also can’t damage your credit or go into debt using one.

Tumin sees this as an advantage if you are looking for a way to avoid going into debt. “You can’t use it to build credit because it is not a credit tool, but you don’t have to worry about going into debt like with a credit card,” he said.

You may need to register a prepaid debit card

After purchasing a prepaid card, you should register the card. Registering it will help you get the strongest consumer protections if your physical card or card number is stolen and used by someone else. Moreover, if you don’t register the card, you may lose some of the card’s features.

Some card providers may require you to register the card upon purchase. Others might require you to register the card after you purchase it. Generally, the registration process entails providing certain personal information that identifies you to the card provider. If your identity cannot be verified, you may not be allowed to register your card. In some scenarios, you may be allowed to spend the initial amount you added to the card or you may have your money returned to you. But in either scenario, once the card runs out of money, you will not be able to reload it if it remains unregistered.

Your card can expire

Prepaid debit cards don’t last forever. If your card expires, you may be subject to fees if you don’t want to lose the funds left on the card. You can review your cardholder agreement to check how you can prevent any loss due to a card expiring. For example, you may be able to request a replacement card that can hold the funds. Or, you might be allowed close your account and receive the card balance in the form of a check.

Know your rights

As a consumer, it’s important to know your rights regarding prepaid debit cards. In regards to fraud and error protection, you generally won’t be held responsible for any unauthorized charges or errors. If reported immediately and if your card is registered, you should be able to receive help with fraud or error issues. Usually the card provided is required by federal law to credit you with the disputed amount to your account while the problem is investigated (if it takes longer than 10 business days).

Another area in which you receive protection is if the bank issuing your card goes out of business. Your prepaid card may have Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) insurance that will secure your money in case of a bank closure. Check your cardholder agreement to see what level of protection you have, and stay away from prepaid debit cards that do not offer FDIC or NCUA protection.

Alternatives to prepaid debit cards

Before you decide if a prepaid card is a good fit for you, there are alternatives you might consider. Just as prepaid debit cards are an alternative to banking, there are alternatives to prepaid debit cards.

Second-chance bank accounts: If you have trouble getting a checking account because of a less-than-perfect banking history, it might be time to look at a second-chance bank account. These accounts help you repair your financial record and demonstrate a pattern of good money management so you can eventually open a standard checking account.

Note that many banks charge monthly service fees for second-chance bank accounts, not to mention extra account and debit card setup fees. Also, beware that if fraudulent activity caused you to lose access to standard checking account services, some banks will not let you open second-chance accounts with them.

Online banking: Some online banking sites may provide alternative access to traditional debit cards for those who are unbanked. Chime is one such option you may consider. This service is a mobile bank account that provides you with a debit card that can be used to shop anywhere Visa is accepted. You will also have access to over 30,000 ATMs. There is no minimum balance requirements, overdraft fees, or monthly fees.

Simple does not charge fees to bank with them. Their debit card can also be used anywhere Visa is accepted and at ATMs. Transactions that exceed your available balance will usually be declined but you won’t be charged overdraft fees or interest.

Stash similarly provides debit cards through their online banking services with no overdraft, monthly or setup fees.

Determine what’s best for you

As with any major financial decision, what is right for you depends entirely on your financial and personal needs. Before making any decision, including if you should get a prepaid debit card, you should think long and hard about it. Explore all of your options first. Even if you are unbanked, you have options, so make sure you are comfortable with your decision before choosing to use prepaid debit cards.