“Prepaid Debit Cards Explained: Benefits, Drawbacks, and Usage Tips”

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Understanding Prepaid Debit Cards

At O1ne Mortgage, we prioritize consumer credit and finance education. This post aims to provide an objective view to help you make the best financial decisions. For any mortgage service needs, call us at 213-732-3074.

What Are Prepaid Debit Cards?

A prepaid card is a payment method where you—or an employer or government agency—can deposit funds that can then be used to make purchases or ATM withdrawals. Typically, you can’t spend more than the amount you’ve deposited; transactions over that amount will be denied unless your card comes with an overdraft protection program.

Prepaid Cards vs. Debit Cards vs. Credit Cards

Prepaid cards are different from debit cards in that they’re not linked to a checking account, so you don’t need to have a bank account to get one. Unlike a credit card, you don’t need to pass a credit check to receive a prepaid debit card. You won’t pay interest on purchases because they’ll be debited from the amount you’ve added to the card. These cards don’t allow you to carry a balance or to pay off your purchases over time.

Pros and Cons of Prepaid Cards

Pros

• Access to card payment if you don’t have a bank account
• Ability to avoid debt, bank overdrafts, and interest accrual
• Expense tracking through your card’s online account, if available
• If your card is lost or stolen, fraudsters can’t access your bank account or credit line

Cons

• Will not help you build credit
• Come with more fees than credit and traditional debit cards
• Can be inconvenient to regularly reload cash
• May not be accepted by all merchants

How to Use a Prepaid Card

Here’s how to make the best use of a prepaid debit card:

1. Choose a card: Shop for prepaid cards online or in person at stores, banks, and credit unions. Look for features that are important to you, such as overdraft protection, low fees, access to an online account, or the option to make bill payments.
2. Understand the fees: Since prepaid cards can come with a lot of fees, check the card’s detailed fee schedule. Consider how you plan to use the card, and opt for one that meets your needs.
3. Load the card with funds: Typically, you can load a prepaid card using cash at an ATM, retailer, or bank branch; a transfer from checking or savings; direct deposit from your employer; a paper check; or a transfer of government benefits, including a tax refund.
4. Make purchases or ATM withdrawals: You can make purchases just like you would with a bank debit or credit card. Prepaid cards generally can also be used to withdraw cash from ATMs, but fees may be charged.

Do Prepaid Cards Build Credit?

Prepaid cards will not help you build credit. Your payments will not be recorded on your credit report, and your use of the card will not affect your credit score. In this way, they’re more like traditional debit cards associated with a bank account.

Alternatives to Prepaid Cards

There are many options beyond prepaid debit cards that can provide the same or better benefits with lower fees. Especially if you’re opting for a prepaid card because you have no credit history or are rebuilding credit, here are your alternatives:

• Secured credit card: To get a secured credit card, you’ll pay a cash deposit and then receive a credit line in that amount, similar to a prepaid debit card. The difference is that your card usage will be reported to the credit bureaus, helping you build credit.
• Credit-builder loan: Another way to build credit, a credit-builder loan lets you build up a savings account by making regular monthly payments to a lender, which then get reported to the credit bureaus.
• Traditional debit card: You could also opt for a bank account with a traditional debit card, which may come with lower fees.
• Credit-building debit card: Some bank accounts offer debit cards that provide a way to build credit without debt.

The Bottom Line

A prepaid debit card may be useful in some circumstances. Perhaps you’re eager to avoid debt or stick to a budget for a specific reason—such as if you’re helping your teen learn money management skills. But, in general, prepaid debit cards come with fees that can be avoided by opting for a secured credit card or traditional debit card. Make sure to consider the pros and cons and to shop intentionally for a card that is well suited to your needs.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you make the best financial decisions.

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