What are Prepaid Cards?

One of the financial products receiving a lot of attention lately is the prepaid card. A prepaid card functions a lot like a credit card – but it isn’t a credit card.

If you are looking for the convenience of plastic, without having to worry about the cost of interest (there is no credit involved with prepaid cards), or if you want a debit card but can’t get a checking account, a prepaid card is something that might be right for you.

Prepaid Debit vs. Credit

Prepaid cards are actually considered debit cards. This is because you only have access to the money you actually “load” on the card. A credit card, on the other hand, represents money that you are borrowing. This is money that you don’t necessarily have in hand.

If you carry a balance with a credit card, you have to pay interest on it. With a prepaid debit card, you only use money that you have. If you use all the money associated with the prepaid card, you have to add more money – or you can’t spend. You don’t pay interest with a prepaid card, although there can be plenty of other fees.

Advantages to a Prepaid Card

The main advantage to the prepaid card is that it is easy to use. You can pay with plastic, without the worry of using credit. Additionally, a prepaid card can be convenient if you are unable to qualify for a checking account. Some banks are rather choosy when it comes to checking accounts, so it can be hard to qualify. A prepaid debit card allows you access to many of the same banking functions (including the ability to have your paychecks directly deposited to the card), without the bank account.

However, if you can get a checking account, you can achieve the same convenience with a regular debit card. As long as you are careful so that you don’t overdraw your account and rack up fees, a checking account debit card can be a good choice as well.

There are some prepaid cards that do allow you to set money aside for savings (the Mango card will even pay you a yield on your savings). This can be an advantage for those who want to prepare for the future, as well as pay with plastic.

Downside to Prepaid Cards: Fees

The biggest downside to prepaid debit cards is that some of the fees charged can start to add up. Many prepaid cards charge monthly fees, activation fees, ATM fees, balance inquiry fees, and even fees to call customer service and talk to a representative. If you are trying to avoid the rising fees associated with traditional bank accounts, a prepaid card may not actually help you accomplish that feat.

If you decide that a prepaid debit card is right for you, double check the fee schedule first. There are some prepaid cards, like the Chase Liquid Card, the American Express® Prepaid Card, and the American Express Bluebird, that don’t charge many fees at all. The Green Dot card is also another card that doesn’t charge many other fees.

american express prepaid card

Prepaid cards are only accepted where similar credit cards (check the logo on the card) are accepted, so you have to consider rate of acceptance when you choose a prepaid card. Be aware that a prepaid card that is connected to Visa may be accepted more than one connected to American Express.

In general, prepaid cards can be a useful tool to stay away from credit card debt but still have the convenience of plastic. Also, be aware of the fees associated with your prepaid card and use the card carefully so you don’t initiate fees. Prepaid cards will not build your credit, but if you are looking for a simple alternative to a checking account the right prepaid card may work for you. Remember, though, to BEWARE of prepaid cards that charge high fees.

What is your experience with prepaid cards?

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Knowyourbank.com is focused on delivering better banking information to people. We look to educate the consumer through our education and blog sections and then give them the resources to learn about their bank's financial position by using the public data (from the FDIC and NCUA) we aggregate on every bank and credit union in the country. Lastly, we provide access to accounts that consumers can open through our product filters.