Prepaid

Prepaid debit cards (not, it should be noted, prepaid credit cards) let you load money onto a card and spend it anywhere that takes plastic: a gas station, a grocery store, online. However, unlike credit cards, prepaid debit cards don’t extend you a line of credit, so you can’t spend money you don’t have. This has both its advantages and its disadvantages. On the bright side, if you’re trying to impose some financial discipline on yourself, a prepaid card won’t let you live beyond your means. The problem is that the downsides more or less clobber the upsides.

What’s so bad about most prepaid debit cards?

First, a prepaid debit card won’t improve your credit score. It just won’t. You aren’t given a line of credit, so it says nothing about your creditworthiness. Unfortunately, a number of prepaid debit cards will claim to “report to a major bureau,” but even if they do, the bureau couldn’t care less about what you do with your debit card. This sort of misleading marketing prompted an investigation by Florida’s attorney general into the deceptive practices of prepaid debit card lenders.

Second, many prepaid debit cards are riddled with hidden fees. The way that most issuers make money off of prepaid debit (some don’t, and we’ll get to that later) is by levying small and shrouded charges that add up over time, such as monthly maintenance, ATM withdrawal, and even per-use fees. You can end up spending over $100 a year simply for using a prepaid debit card! Regular checking accounts may be getting more expensive, but they’re generally cheaper than prepaid debit.

Finally, prepaid debit cards advertise that you don’t need a credit check to qualify for one. Of course you don’t: it’s not a line of credit! The same could be said of a regular debit card, or the kind of reloadable loyalty card that you get at a coffee shop. Don’t be lured in just because you don’t think you can qualify for anything better. If you want to raise your credit score, a prepaid debit card won’t help you; if you don’t, you can get other products that are easier on your wallet.

The potential of the AmEx prepaid

The new American Express prepaid debit card is trying to change the way prepaid cards monetize. And it’s on its way, trust us, it’s just not there yet. It bills itself as an easy-to-understand, low fee alternative to the fee-ridden and shifty prepaid cards out there. In terms of transparency, the AmEx Prepaid gets an A, because it doesn’t charge for silly things like balance inquiries or for not using your account enough. Its fee structure is really easy to understand: it charges $2 per ATM withdrawal (the first one each month is free), and if you want to reload the card with cash, you need to buy a Green Dot MoneyPak, which costs $4.95.

But if you want to reload the card without paying money, you need to use an AmEx credit card or link it up to an existing checking account. Unfortunately, that pretty much kills your motivation to get the card – if you’ve got a checking account, why do you want to go prepaid? The main function of a prepaid card is to serve the unbanked, who don’t have checking accounts. American Express says it’s working on allowing free direct deposit. When it does, it truly will be the best prepaid debit card on the market, but until then, we’re not huge fans of it.

What’s a good alternative to a prepaid card?

Depending on what you’re looking for, you can get cheaper and/or more useful financial products than prepaid debit.

I want to raise my credit score. If you have bad credit or no credit, you should consider a secured credit card. Because it extends a line of credit, a secured credit card lets you build up your credit score, but since the credit is backed by collateral, it’s essentially risk-free for banks, so they’re more likely to lend to a potential credit risk. You post a deposit upfront, usually equal to your credit limit, and then use the card like a regular credit card. Once you close the account, you get your deposit back. Check out our list of the best secured credit cards to learn more.

I don’t want to spend money I don’t have. If you’re trying to avoid credit altogether, you should consider a traditional checking account. The news is filled with cries that free checking is disappearing, but that’s not entirely the case. Most credit unions offer no-strings-attached free checking, with no minimum balance requirements.

I want to teach my child financial responsibility. Many prepaid debit cards are targeted towards kids as a way to have the convenience of plastic without the risk of credit. However, these “kid-friendly” prepaid cards are often quite expensive, with high ATM, balance inquiry, per-transaction or monthly maintenance fees. Set a good example for your child, and choose a low- or no-fee checking account. Many banks offer youth/teen checking that let parents see the balance or automatically add to the account, and some offer financial literacy tools or text message balance alerts.