The Pros and Cons of Prepaid Debit Cards

By Sarah Watts

For most, prepaid debit cards are for birthdays or holidays, in lieu of cash. But for Ashley Bock, 28, a prepaid debit card is how she was able to buy her first house.

In order to curb her spending, Bock, of Chicago, Illinois, cut up her debit and credit cards in 2010 and moved her money to a bank account across town. With no ATMs nearby, Bock had to travel over 25 minutes each way to access her money at the bank—something she was unwilling to do with two small children.

“I made spending money a huge inconvenience for me,” she said.

For day-to-day expenses like groceries and gas, Bock loaded a small amount onto a prepaid Visa every two weeks, on payday. “I only loaded it up with what I allowed myself to spend,” she said. “I was never willing to drive those 25 minutes to get out extra cash.” Using this method, Bock was able to quickly save enough money to put down a substantial down payment on a house, which she purchased in 2011.

Author and NerdWallet.com columnist Liz Weston is a big proponent of prepaid debit cards, having purchased one for her daughter to use on a European vacation two years ago. “I wanted my daughter to have experience using a card and I wanted to have those protections without giving her access to my bank account,” Weston said. After the family returned stateside, Weston discovered that the card had been stolen and the thief had made fraudulent charges. When she reported the stolen card to her provider, American Express, the money was restored quickly.

“A prepaid debit card has an advantage in that way,” said Weston. “I prefer a prepaid card because if it’s compromised the bad guys can’t get in to your bank account.”

The protections for each prepaid debit card, including zero liability protection, depend on the issuer, however. “I would do research before assuming you have that kind of protection,” said Weston. 

Using a prepaid card also has drawbacks. Virtually every debit card on the market carries monthly service and ATM fees, which could potentially add up to hundreds per year. The American Express Serve Cash Back Card, for example, commands a $5.95 monthly fee, in addition to a $3.95 fee to load money onto it, according to NerdWallet.com

Another drawback, said Weston? Prepaid debit cards don’t impact your credit score whatsoever. 

“I still think having a good credit score is essential,” she said. “It’s not just about borrowing money. Your credit score determines whether you get a good cell phone plan and how much you pay for insurance.” Weston recommends using a credit card for daily purchases and paying off the balance in full each month to keep generating your credit score.

“But if you really don’t trust yourself with credit, then a prepaid card is probably the better way to go,” Weston said.

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