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What's hot--and not--about prepaid debit cards

By , CardRatings contributor
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What's hot--and not--about prepaid debit cards

If you listen to the media, you'd think we'd all dropped our credit cards in favor of swiping prepaid debit cards instead. Sure, there's plenty to like about prepaid debit cards, but there are various downsides to think about, too. Before you kick your credit card to the curb, take a look at what's hot--and not so hot--about prepaid debit cards.

What's Hot

You're forced to spend within your means: You determine how much you can spend, and then when the money's gone, you're forced to stop spending. If you have issues with self-control, this might help you stay out of debt.

Those lime-green designer shoes you thought you had to have? Sorry, but if there's not enough money left on your prepaid card, you can't have those shoes. Unless there's an earth-shattering reason why you need those shoes (and I can't think of a single one), you've been saved from going into debt.

Another good use for these cards is to limit how much your college-student kids can spend. Parents can give their college students a prepaid debit card to pay for books and an occasional pizza. You'll still get a call asking for more money, but at least you'll know how much they just spent.

Your credit history doesn't matter: If you don't qualify for an unsecured credit card, no problem. You can get a prepaid card. There are no credit checks because you're putting your own money on the card.

Now, prepaid debit cards generally don't improve your credit history. But there are some prepaid cards, such as the AccountNow® Prepaid MasterCard®, that function almost like a secured credit card. The difference is that the money you've loaded onto your card isn't connected to a deposit in your bank account. According to the cardholder agreement, this is not a credit card, but they do report your payments to credit bureaus, which can build your credit history. But like many prepaid cards, it has an array of fees so read the cardholder's agreement carefully.

You get the convenience of a credit card: You could just use cash, but if you need to shop online and you don't have a credit card, you're in a pickle. This is one of the reasons prepaid debit cards have become an option for students and others who don't qualify for a credit card. Sometimes you need plastic to get what you need. And like credit cards, some prepaid cards are even offering rewards features.

A prepaid debit card is also a good option for the "unbanked," or those who don't have bank accounts. If you're part of this growing demographic, these cards give you a place to park your paycheck.

What's Not

All the fees: You're to be commended for wanting to avoid paying interest charges on a credit card. But you have to know what you're getting into with a prepaid debit card because the fees can eat up a lot of your balance. Read the "terms and conditions" statement carefully. There, you'll get information about the fee structure as well as the limits placed on specific transactions.

Here are a few fees to watch out for, with the estimated fee in parenthesis: activation fees ($9.95), ATM withdrawal fees ($2.50), balance inquiry fees ($1.00), monthly maintenance fees ($9.95), and even fees for calling customer service ($2 per call!). And how about this one? Bank teller cash advance charge: $4.95.

If you want to add money to a prepaid card, you might be able to buy a Green Dot MoneyPak card at stores, such as Walmart and Kroger, for $4.95. You take the MoneyPak card to the cash register and decide how much cash you want to put on your prepaid card. But don't forget that you pay $4.95 for this convenience.

Weak consumer protection: If someone steals your card and your PIN, you may get your money back, but it could be a long, painful process. You don't have the same automatic federal statutes protecting you that you do when you use a credit card.

According to the Federal Reserve, here's how it works with debit cards. If your card is lost or stolen, report it within two days to limit your liability to $50. Beyond two days, your liability can be as high as $500. If it takes you more than sixty days to report the theft, you might be liable for the entire amount. Now, some card issuers offer more protection--even if it isn't required by law. Read your card agreement carefully so you what your card issuer's policy is just in case your card is stolen.

No leverage on a bill dispute: Let's say you buy a first-edition book online, but when it arrives, you're unhappy with its condition. You try to contact the individual or company who sold t to you, but they've vanished into the night.

With a credit card, you're protected by federal law. You can contact your credit card issuer and you don't have to pay the bill until you've settled the dispute. With a debit card, though, it's as if you paid cash and there's no recourse if the seller skips town.

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