A prepaid debit card (note that it’s not called a prepaid credit card) allows you to load money onto a card and spend it anywhere plastic is accepted – at a gas station, online or in stores. Unlike with a credit card, you can’t spend more than you’ve put onto your prepaid debit card, which functions like a checking account with more fees. You’ll often find yourself charged an annual or monthly fee, a reloading fee, an ATM fee and charges for paper statements. In fact, prepaid debit cards are almost always more expensive than regular debit cards: even the most un-free checking account is probably cheaper than your average prepaid card.
In truth, there’s almost no reason to get a prepaid debit card. Even if you have a bad or limited credit history, you have much better options. Trust us. Any budgeting help or self-discipline you get from a prepaid debit card will be wiped out, and then some, by fees. It’s generally more expensive than a credit card, but without the ability to borrow.
Prepaid debit cards: the myths and the reality
Myth: a prepaid debit card will improve your credit score. This claim is entirely false: most prepaid debit cards in no way help rebuild your credit score. Think of it this way: a credit rating agency wants to see that you can handle borrowing some money and then paying it back. Why would the agency care that you didn’t over-borrow on a card that you can’t borrow on? A secured credit card, on the other hand, can rehabilitate a poor credit score.
Myth: prepaid debit cards can help me manage my money. Sure, a prepaid debit card can help you stick to a budget: since you can’t go over the limit, you might be more conscious about not overspending. Still, there’s nothing stopping you from reloading the card. And sound money management includes avoiding fees whenever possible. It makes little sense to pay $100 or more a year, plus $1.50 every time you use an ATM, just to set limits on yourself. If you have a checking account and a savings account, you can accomplish the same goal for free. Simply keep the majority of your money in your savings account, and transfer a fixed amount onto your debit card. Alternatively, if you want to limit your spending at a specific store such as Starbucks, many retailers offer prepaid cards valid only at their store, which incur no fees and often earn loyalty rewards.
Myth: because I have bad credit, prepaid credit cards are the only cards I qualify for. If you have bad or limited credit, you should work on bringing up your credit score. A prepaid debit card can’t help you with that. On the other hand, a secured credit card is accessible to anyone and will raise your score, provided you don’t miss any payments or incur other penalties. You’ll have to post some money upfront, equal to your credit limit, as collateral. You won’t be able to pay off your debts with that money, and you’ll get it back only when you close the account. Still, a low credit limit is better than none, and a secured credit card will set you on the road to better credit.
Here’s the plain truth: prepaid credit cards can be killer. Take a look at this fee table of what a prepaid debit costs each month. We assume you reload the card and use an ATM twice each month:
|Card Name||ATM Fees (2x)||Reloading Fees (2x)||Monthly Fees||Cost per Month|
|American Express Prepaid||$2||$9.90||$0||$11.90|
|Capital One Prepaid MasterCard||$1.95||$0||$4.95*||$8.85|
Now compare that to secured credit cards, even those with annual fees. To make things even sort of fair, let’s assume that you carry $200 worth of credit card debt each month. If you don’t carry a balance, it wouldn’t even be a question between prepaid and secured credit.
|Credit Card||Annual Fee/12||Credit Card Debt||Total Monthly Cost|
|Capital One Secured||$2.42||$3.82||$6.24|
*Ongoing annual fee – it’s waived the first year
As you can see, both alternatives are cheaper than prepaid cards. If you don’t carry a balance, the Capital One Secured is the best for you, but if you do, stick with the Orchard Bank card’s low APR but higher annual fee.
Alternatives to prepaid debit cards
There are many alternatives to prepaid debit cards, though the best choice for you depends on why you’re looking at prepaid debit in the first place.
Secured credit cards, for those with bad credit. We mentioned secured credit cards a couple times, but it bears reiterating. If you have less-than-stellar credit, prepaid debit won’t do a thing for your credit score. But a secured credit card won’t cost any more than a prepaid debit card, and will help you to eventually qualify for a better credit card. Citibank and Capital One are reputable banks that offer secured cards with lower fees and an option to “trade up” after 12-18 months of good behavior.
|Capital One® Secured MasterCard®|
|Annual Fee||Signup Bonus||APR , Variable*||Intro APR Promotions|
|$29||None||22.9% (V)||Purchase: None
Regular (unsecured) credit cards, for those who don’t mind some fees. Some banks cater to those with bad or limited credit, offering credit cards with low limits in order to help them bring up their scores. Credit unions are good resources, especially for students or immigrants who’ve yet to establish a credit history. The Orchard Bank credit cards are aimed at those with poor credit. The cards come with a $39 processing fee, an annual fee of $59 that’s lowered to $29 the first year, and a variable interest rate that as of April 18th is 19.9%. These are better terms than you’re likely to find anywhere else without having to post money upfront, especially since banks are wary about lending to those with bad credit. The average interest rate for poor credit brushes up against 24% – compared to what you usually see, Orchard Bank’s Visa and MasterCard offer good terms.
Youth/Teen checking, for kids. There are a number of teenager-focused prepaid debit cards that claim to teach personal finance without allowing the kid to get into too much trouble. However, these cards run into the same problems as adults: they’re studded with fees like an apple with cloves. It’s far better to open a standard checking account, and refuse to opt in to overdrafts. Wells Fargo offers teen checking, which allows parents to transfer money into their child’s account, gives adults online access to the account, and has no fees if you use online banking. Truth be told, though, a regular checking account will do just fine.
Rewards checking, for adults. If you’re looking for a way to limit your spending habits, consider a rewards checking account. You won’t be able to overdraw (and therefore incur fees) unless you explicitly decide to, and you can transfer money between your checking and savings accounts. You can also earn interest through a rewards checking account. Find one with a low minimum balance – some banks won’t let you earn rewards unless you have a certain amount in the account. That way, instead of losing money through prepaid debit card fees, you can earn as much as 4% with a high-yield checking account. Alternatively, you can find a cash back debit card, which will refund you 1-2% of your purchase.