Roughly 6 million American households do not have a bank account.
Given that you would need one to obtain a credit or debit card, spending or managing your money could be challenging without one.
If you fall into this category, one viable option you can use is prepaid cards. They are simple to obtain because many prepaid debit cards don’t verify your credit. Even in the event that your bank collapses, your deposits will be insured by the FDIC for a maximum of $250,000 in your favour.
If you are interested in getting a prepaid debit card, then read this article to find out how, its features, plus the benefits and downsides that come with owning one.
What is a Prepaid Debit Card?
A prepaid debit card only allows you to spend the funds you have loaded onto it.
They are also called:
- pay-as-you-go cards
- stored-value cards
- general-purpose reloadable prepaid cards
Unlike credit cards or debit cards, you don’t need a bank account to own one.
Is a Prepaid Card the Same as a Debit Card?
With a regular debit card, the amount of money you can spend is tied to how much you have in the checking account it is linked to.
So you need to have a bank account to use a regular debit card, while you don’t with a prepaid debit card. With a regular debit card, the amount of money you have available to you will also fluctuate from day to day, as money moves in and out of your checking account.
With a prepaid debit card, you have a fixed amount of money to spend, which declines as you spend it and rises only if you reload the card.
7 Features of Prepaid Debit Cards
Prepaid cards vary widely, but they tend to have these features in common:
Fees
Activating or obtaining a card, making deposits, and using an out-of-network ATM may all require payment. There is frequently a monthly fee, though this can occasionally be avoided, for instance by setting up direct transfers. Some cards charge fees for each purchase and ATM withdrawal.
Options for reloading
There are typically several ways to add money to a card, including:
- setting up direct deposits
- loading cash at participating merchants
- depositing checks at ATMs
Some cards allow you to use your smartphone to deposit checks or make online transfers.
ATM access
Some prepaid cards allow access to branded bank networks for cards issued by banks or to free nationwide ATM networks, like MoneyPass and Allpoint.
Amount restrictions
Some cards include limits on the amount you can withdraw, reload, or spend over the course of a day, week, or month.
Security
Reloadable prepaid cards are safeguarded by federal law from liability and fraud.
Federal deposit insurance is one precaution many cards have, meaning your money is protected in the event that the issuer goes bankrupt. Keep in mind that in order for your funds to be covered by the Federal Deposit Insurance Corp., you must register your prepaid card with the card’s issuer.
Expiration dates
Prepaid cards have expiration dates.
This however does not affect the funds in your card, but you’ll need to be reissued a card before it expires so you can continue using it.
Other features
Some prepaid cards offer additional features such as:
- check writing
- online bill payment
- sub-accounts or separate cards for family members
A select handful even provide rewards like cash back on purchases, much like reward credit cards.
How do I get a prepaid debit card?
A prepaid debit card can be obtained by making a purchase from a retailer, bank, credit card company, or any other provider of financial services. The money you put on a prepaid debit card when you buy it is often kept by a bank or credit union.
What are the advantages of a prepaid card?
Low-risk way to manage money.
One reason to opt for a prepaid card over other forms of plastic is that it’s a relatively low-risk way to manage your money. Since you can only use funds that you load onto the card, you will be much more careful with your spending.
Learn better financial habits.
Prepaid debit cards are also a good way to teach yourself financial habits.
You learn how to operate within a budget, delay gratification or buy things that you need and don’t want. Additionally, parents can also use prepaid cards as a way to teach their kids about money before making them authorized users on their credit cards.
Helps with budgeting.
If you struggle to stick to a budget, you can use a prepaid card to help monitor your spending. Your side goal could be eventually graduating to a credit or debit card.
What are the Disadvantages of a Prepaid Card?
No effect on credit score.
Because prepaid debit cards aren’t credit cards, they don’t affect your credit score. However, you can’t build credit with them, either. For that, you’d want to consider a secured credit card.
Lack of bank services.
Prepaid cards also don’t automatically have all the features you’d expect with a checking account, including:
- access to an ATM or branch network
- online or mobile banking
- bank services such as wire transfers and the ability to stop payments
Technical glitches.
Some prepaid card users have experienced challenges and inconveniences in the past. Several prepaid cards have been affected by technological outages that lasted days or weeks. One example is The Walmart MoneyCard which experienced an outage in 2016.
When Would You Need a Prepaid Debit Card?
There are several reasons why you would need a prepaid debit card.
If you don’t have a credit card or a bank account, then getting a prepaid debit card is a good option. Additionally, a prepaid debit card would suffice if you:
- want greater control over your finances
- to cut down on your expenses
- need to teach yourself money management skills
This is because you only spend what is on your prepaid card. This makes you more conscious of your spending.
Alternative to a Prepaid Debit Card
If your lack of credit history or poor credit history is the reason you need a prepaid debit card, you might want to think about getting a secured credit card instead.
Because you must pay a refundable security deposit that serves as collateral for the lender, secured cards are simpler to qualify for.
A secured credit card has the benefit of allowing your monthly payments to be recorded to the three major credit agencies, which will help you establish a credit history. No matter whether they are prepaid or normal, debit cards don’t record transactions to credit bureaus and have no effect on your credit score.
Photo by Giovanni Gagliardi on Unsplash
