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The Pros & Cons of Prepaid Debit Cards

Did you know there are nearly 10 million households in the United States that don’t have a bank account? For them, basic items such as cashing a check or paying bills can become difficult and very expensive tasks.

Prepaid debit cards can be an option, allowing customers to enjoy the ease of direct deposit, the flexibility of a being able to pay with plastic, and the organization of online bill pay.

These cards work a lot like a gift card; you will have to load the account with cash (direct deposit is usually available) before you can use it for a purchase. Let’s take a closer look at what prepaid debit cards offer.

The Pros

These cards look like credit cards and can be used for most situations that require a credit card. However, they are not credit cards. Instead of granting you a credit limit based on your financial standing, these accounts require you to “load” the card with your own money.

Getting a prepaid card is usually easy, even if you have credit problems. You can’t get into debt using a prepaid card, since you cannot spend more than the balance you have deposited. (A few cards may allow you to overdraft the account, but most don’t. If they do allow overdrafts, you may be charged a fee.) Also, you will not be charged interest for your spending.

Other pros of prepaid debit cards:

  • Easy approval process, no credit required.
  • Some liability protections for cards carrying the American Express, MasterCard or Visa logos.
  • Can be used for online or phone purchases.
  • Cash can be accessed from ATM machines.
  • May be less expensive than check-cashing services.

The Cons  

Prepaid debit cards do not report your payment history to the credit bureaus, so this type of card will not help you improve your credit. (If you’d like to see your credit standing, along with your credit scores, check out Credit.com’s free Credit Report Card.) Prepaid cards cannot be used in all situations. For example, hotels and car rental agencies will not allow you to use a prepaid card to secure your rentals.

Other cons:

  • May have expensive fees for opening and maintaining the account.
  • May have fees for loading money on the account or using the card for purchases.
  • The cards tend to have fewer fraud and billing protections than credit cards.
  • Does not help improve your credit.
  • May be more expensive than opening a checking account and using an ATM card.

Fees and charges can vary significantly between different prepaid credit card offers. Be sure to read the fee schedule for the prepaid credit card before you apply.

Image: iStockphoto

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