First Person: The Downsides of Prepaid Debit Cards

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For young adults who can't qualify for a credit card, a prepaid debit card may seem like an excellent choice. A prepaid debit card certainly is a valuable product for many consumers, but you should know their downsides before applying for one.

The Fees Can Kill You Financially. Before you sign up for a prepaid debit card, be sure that you understand its fee structure. Some consumers get these cards because they are tired of paying what they consider to be excessive bank fees. However, prepaid debt cards generally charge fees as well. For example, there may be fees to activate the card, to add money to the card, to get cash at an ATM, to make purchases using a PIN, for inactivity, to check the balance on the card, for overdraft protection, and so on. Understanding what fees apply to a card and what triggers them can enable you to avoid some of these charges and, therefore, minimize the cost of the card.

Some Cards Link to a Very Expensive Line of Credit. If you take a cash advance against this line of credit you could be borrowing at a triple-digit annual interest rate, so beware of this feature.

Prepaid Debit Cards Don't Have the Same Regulatory Protection as Credit Cards. This is another area where it is important to educate yourself so you can avoid problems. One regulatory issue with prepaid debit cards is that they generally have much stricter rules with regard to reporting a lost card to the issuer. If you wait too long, your exposure to losses could be far higher than it would be with a credit card.

It Is Unclear How Much, If Any, FDIC Protection Your Money Has on Prepaid Debit Card. If you have your money in a bank account, it will have FDIC protection up to a statutory limit, but it is not certain that this protection applies to money on a prepaid debit card. If not, you could lose your funds if the issuer goes out of business, and there have been plenty of bank failures in recent years.

You Won't Build a Credit History By Using a Prepaid Debit Card. Using a credit card responsibly can be a good way to build a credit history and earn a high credit score. Using a prepaid debit card also is wise, but it won't help your credit score, since activity on the card generally is not reported to credit bureaus.

Recovering Your Money in a Dispute with a Merchant May Be Difficult. Dealing with a disputed purchase made with a prepaid debit card may be more difficult than with a credit card, since you don't have the option of withholding the funds. Therefore, a prepaid debit card may not be the best option for large purchases.

You May Not Be Able to Use the Card for All Transactions. Some hotels and rental car companies may not accept prepaid debit cards or, if they do, they may put a hold on the card to cover potential charges. As a result, your available funds could be severely limited or completely wiped out by the hold.

It Can Be Hard to Keep Track of the Balance on Your Card. Unless you are a fastidious record keeper and are aware of any fees being applied to your prepaid debit card, it can be difficult to know what your balance is, and not knowing can result in fees or other problems. Further, checking the balance itself may trigger a fee.

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