As with any new endeavor, consumers should weigh the good, the bad and sometimes the ugly before making an informed decision.
When it comes to prepaid debit cards, many experts contend there’s really only “bad” and “ugly” involved.
However, looking at the positive aspects, prepaid debit cards provide the unbanked consumer with access to cash using plastic without having to open a checking account.
"Unbanked and underbanked [people] are a popular market for these cards, which is one reason one might end up with a prepaid card. And it may be cheaper than a checking account, especially if you've been paying overdraft fees lately," Gerri Detweiler, director of consumer education at Credit.com tells The Street.
Checking account fees can run as high as $15 a month just for maintenance, not to mention overdraft and NSF fees.
Additionally, prepaid debit cards are relatively easy to use. Simply load the card (and in most cases, reload again and again) and start shopping. Plus what teenage girl wouldn’t feel extra special buying that cute cardigan using her Justin Bieber prepaid debit card?
In fact numerous celebs are slapping their mug upon prepaid debit cards ranging from the George Lopez to Suze Orman.
Personal Finance Digest broke down the celebrity prepaid debit card choices and found that they were riddled with fees, with some cards not even donning the celebrity’s photo on the card (reducing its street cred).
What About Prepaid Debit Card Fees?
Fees seem to be one of the biggest concerns surrounding prepaid debit cards. While many banks charge a fee to open and maintain a regular checking account (often like the prepaid debit card), most credit unions offer a fee-free account that comes with a free debit card.
For the Justin Bieber prepaid card alone, WFMY News found that cardholders must pay a monthly fee of $3.95 in addition to the loading charge from another debit card of $2.95 ($.75 from a checking or savings account). If you lose the card, its $7.95 for a replacement and if you haven’t used the card in 90 days you’ll be slapped with a $3.00 fee. The user is also charged $1.50 for making a withdrawal and $.50 for a balance inquiry.
Lil Wayne’s prepaid debit card has $7 activation fee, $5 reload fee and a $4 monthly fee. Even if you don’t go for a celebrity card, chances are you’ll still be hit hard with fees.
"It's hard to find a prepaid card without a menu of different fees, from a monthly fee, to an inactivity fee, to a fee for a paper statement, plus fees for talking to a customer service representative," Detweiler says.
Will Debit Cards Help Me Build Credit?
If you are trying to establish or re-establish credit, don’t look to a prepaid debit card for help.
Because you aren’t taking a line of credit, but instead simply recycling your own money through plastic, you aren’t going to show up on Experian, Equifax or Transunion’s radar. Credit bureaus base their score decision on how you manage other people’s (bank’s or credit union’s) money so being able to use a prepaid debit card won’t provide you with any advantages for credit building.
What can help is to open a credit union credit builder account, like the one offered at Digital Federal Credit Union ($4.7 billion, Marlborough, MA). The amount you borrow is deposited into your DCU savings account and you make regular payments on the loan, which establishes a positive payment history.
Another path is to open a second chance checking account at a credit union. While most second chance accounts charge a monthly fee, fees are typically lower than what is associated with the prepaid debit card, plus the member can build credit and use a debit card at the same time.
What if I Lose My Prepaid Debit Card?
Although there may be some safeguards in place for most prepaid debit cards, fraud and theft protection may not be as extensive as what you might find with a regular credit or debit card.
"With a credit card, the most you can be held liable for is $50 and the ability to dispute a charge. There is no ability to dispute charges with a debit or prepaid debit card," Detweiler says.
For example, State Employees’ Credit Union ($437 million, Raleigh, NC) states on its website (with regard to its debit card), “If you believe your card and PIN have been lost or stolen and notify us within two business days, your liability will not exceed $50.00 if someone uses your card and PIN without your permission.”
Before you invest in a prepaid debit card, check with a credit union near you and ask about associated checking account fees. Compare and contrast what you would pay for a prepaid debit card versus a credit union checking (with debit card and vast electronic services) before making a decision.