Prepaid Debit Cards: Are They Right for You?

Debit card photoThe popularity of prepaid debit cards has been rising in recent years, including those endorsed or sold by celebrities. According to the Consumer Financial Protection Bureau, more than 7 million consumers use prepaid cards—and that number is expected to rise in the coming years.

Prepaid cards are often marketed to people who don’t have bank or credit union accounts as a way for them to get banking-like services. One of the main differences between prepaid debit cards and credit or traditional debit cards is how these cards are funded:

  • Prepaid debit cards: you load money onto the card and you can’t spend more than that amount.
  • Debit cards: the money you spend is withdrawn from a bank account.
  • Credit cards: the money you spend is borrowed from a bank or business, and you have to pay it back; if you don’t pay the entire balance, you’ll be charged interest.
Prepaid Card Options for Servicemembers
  • Family Support Debit Card: The Defense Finance and Account Service provides this card to the families of Wounded Warriors to help cover the initial costs of visiting wounded servicemembers.
  • EagleCashTM: A prepaid card that supports deployed U.S. military personnel, developed by the U.S. Army, U.S. Air Force and U.S. Department of Treasury.
  • Direct Express® Card: A prepaid debit card that allows federal beneficiaries who don’t have bank accounts another option for managing cash.

If you’re considering a prepaid debit card, here are three questions to ask yourself to help you decide if one is right for you:

  1. Am I trying to control my spending? If so, a prepaid card might be a good choice for you. Since you can’t spend more than you have on the card, you won’t be charged any overdraft fees and you won’t be able to go into debt. But keep in mind that most prepaid debit cards do charge fees for many routine services (see question 3 below).

    Don’t forget that using cash for purchases is still an option that can help you control spending. While there are limitations to using only cash, it can help you stay out of debt. See our Start a Spending Plan action plan for help with controlling your spending.
  2. What are the fees—and are they worth the cost? Most prepaid debit cards charge fees for routine services. However, some companies are starting to offer prepaid debit cards with significantly fewer—and lower fees—than has been the norm the last several years. In addition, some card companies will waive certain fees if you set up direct deposit.

    Depending on the card, you may pay fees for purchasing the card, placing money on or reloading the card, monthly account maintenance, purchases, online bill paying, using an ATM, balance inquiries and choosing to receive paper statements. Just make sure you understand what the fees are before signing up for a card.
  3. Do I have a credit problem? It’s true that using a prepaid debit card can prevent you from spending more money than is loaded on the card—and from going into debt. However, you need to think about whether this approach to dealing with a credit problem is worth the fees that come with a prepaid debit card.

    You should also keep in mind that prepaid debit cards don’t usually help you build a credit history. Because you’re not borrowing money when you use a prepaid debit card, the major credit bureaus often don’t look at your prepaid debit card behavior when determining your credit score. A few prepaid debit cards allow you to report your activity to some of the major credit bureaus, but many do not. Learn more about credit scores and credit reports, and controlling your credit.

Other Considerations
There are important differences among prepaid debit cards. Not only do the fees vary, but some cards come with features that others don’t include—such as savings tools or banking services, which are discussed below. And your reason for using a prepaid debit card may be very different from someone else’s. Here are some considerations to keep in mind as you decide if a prepaid debit card is for you:

  • Savings tools. Some prepaid debit cards are starting to offer savings or “rainy day” tools that allow you to automatically set aside a certain amount of money on a regular basis into a savings account. Some banks also provide this feature to their customers who have traditional debit cards. Learn more about other ways to save.
  • Some federal consumer protections don’t apply. Before you decide to use a prepaid debit card, you should be aware that, unlike traditional debit and credit cards, prepaid cards don’t come with protections like caps on fees. And most prepaid cards also don’t offer fraud-detection services. However, if your prepaid card is lost or stolen, you should immediately call the card company—many protect cardholders against unauthorized purchases.
  • Banking services. Some prepaid debit cards provide banking services like online bill paying (sometimes for a fee), person-to-person (P2P) payments and mobile apps. If these are services you’re looking for, you may also want to consider a traditional debit card from a credit union, online-only bank or traditional bank. Some of these institutions now offer free or very low-cost checking accounts that come with debit cards and other features, and don’t require minimum balances.
  • Teaching teens about money management. If you’re trying to teach a teenager how to spend money and manage a credit card responsibly, then you may want to use a prepaid debit card. Some prepaid debit cards allow you to create subaccounts for family members and even friends, which you can use as a teaching tool for teens. Learn more on teaching teens about money.

As with all financial products, before you make a choice be sure to shop around. You should compare the fees and features of a variety of prepaid cards to ensure you’ll be getting the most value for your money. And before you start using the card, make sure you fully understand how the fees work.