Prepaid debit cards are more popular than ever. And they are easy to acquire. You can even pick one up at a convenience store.
Prepaid cards are often marketed to people who don't have bank or credit union accounts as a way to get banking-like services. But people with bank accounts are using them, too. If you're considering a prepaid debit card, here are three questions to ask 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. Since you can't spend more than what's on the card, you won't be charged any overdraft fees and you can't go into debt. But keep in mind that most prepaid debit cards do charge fees for many routine services.
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 control debt.
2. What are the fees—and are they worth the cost? Most prepaid debit cards charge fees for routine services. Depending on the card, you may pay fees to purchase the card and to place money on or reload the card, as well as fees for monthly account maintenance, purchases, online bill paying, using an ATM, balance inquiries and choosing to receive paper statements.
However, some companies offer prepaid debit cards with significantly fewer—and lower—fees than in the past several years. In addition, some card companies waive certain fees if you set up direct deposit to your card. 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 help keep 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 handling a credit problem is worth the fees that come with a prepaid debit card.
You also should keep in mind that prepaid debit cards usually can't help you build a credit history. You're not borrowing money when you use a prepaid debit card, so the major credit bureaus often don't look at your prepaid debit card behavior when they determine your credit score.
What Else to Consider
Remember, prepaid debit cards are not all alike. Not only do their fees vary, but some cards come with features that others don't—such as savings tools or banking services. Here are some considerations to keep in mind.
• Savings tools. Some prepaid debit cards offer savings or "rainy day" tools that let you put a certain amount of money into a savings account automatically on a regular schedule. Some banks also provide this feature to their customers who have traditional debit cards. See the FINRA Foundation's website for 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 don't offer fraud-detection services. But if your prepaid card is lost or stolen, you should immediately call the card company, as 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 you're looking for services like these, you also might 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.
• Teens and money management. If you're trying to teach a teenager how to responsibly spend money and manage a credit card, then you may want to use a prepaid debit card. Some prepaid debit cards allow you to create separate accounts for teens, which you can use as a teaching tool. Learn more about teens and money.
As with all financial products, be sure to shop around before you make a choice. You should compare the fees and features of several prepaid cards to ensure you'll be getting the most value for your money. Before you start using the card, make sure you fully understand how the fees work.
For more information about saving and investing, go to www.finra.org/investor.
FINRA is the largest independent regulator for all securities firms doing business in the United States. Our chief role is to protect investors by maintaining the fairness of the U.S. capital markets. FINRA does not endorse, sponsor, or guarantee, nor is it sponsored by, any advertisers on this site, and any dealings with those advertisers are solely between you and the advertisers.