When a friend of mine cut up her credit card and moved to a cash-only system, I was jealous of her freedom. “It’s great,” she crowed at coffee one day. “I don’t go into debt anymore.”
“But,” I countered, “how do you rent a hotel room or a car?” The answer for her was simple: prepaid debit cards. Prepaid debit cards look and act like a credit card but with one key difference: no line of credit. You add money to the card and you can use it like a credit card until the money runs out. When the money is gone, there are no overdraft fees or carryover balances. The money is either there or it isn’t.
The Network Branded Prepaid Card Association found that consumers who use prepaid debit spend less in banking fees than consumers who have a checking account. Sounds simple, right? Well, not so fast.
Prepaid debit cards aren’t quite the miracle cure to our debt-riddled culture. They often come with hefty fees. In a 2011 study, the Consumers Union found that prepaid debit cards hoisted more debt on consumers than traditional banking fees.
So, how do you know if prepaid cards are right for you? Time to weigh the pros and cons.
The Pros and Cons of Prepaid Debit Cards
1. Curbs your spending—It goes without saying that limiting your spending to cash-only is the most effective way to stop racking up debt. And in our credit culture, a prepaid debit card allows you the flexibility of a credit card without the credit.
2. Protects your money—If you are on a cash-only spending diet, it can be dangerous to carry around wads of cash. And if your credit card or debit card is stolen, thieves can rack up credit and drain your bank account before you notice you’ve been robbed. A prepaid debit card isn’t tied to your bank account and carries no line of credit, protecting you from the worst-case scenario.
3. Doesn’t harm your credit—If you have a history of overdrawing on your account or being unable to pay your credit card bill and your credit score is suffering because of it, a prepaid debit card might seem like the easy answer. Since they aren’t connected to a line of credit, prepaid debit cards won’t hurt your score. But they also won’t help it.
1. No insurance—The Consumers Union warns that unlike credit cards, prepaid debit cards don’t always provide protection against theft. Your card is being using in Bangalore while you’re still in Poughkeepsie? Well, you might not know until you’re out of money.
2. Fees—You think your bank is bad? Some prepaid debit cards have bill payment fees, balance adding fees, dormancy fees, overdraft fees, fees for retrieving any remaining balance still on your card and more. Prepaid debit cards fall outside of many consumer protections and regulations set up by the government to prevent banks from preying on you. So many prepaid card companies get a little fee-happy.
3. No credit—Building up a line of credit is important if you want to rent an apartment, own a home or buy a car, and a credit card is one of the main ways consumers can build a line of credit or improve their credit history. Debit cards don’t do that. And while there are some that claim they do, the Consumers Union warns that the claims of the card may be overstated.
Do you like prepaid debit cards? Have they helped you get out of debt?