The Truth About Prepaid Debit Cards

The Kardashians of reality television fame recently signed on to put their images on a prepaid debit card aptly coined the "Kardashian Kard." When negative publicity questioned the card's fees as predatory, the sisters quickly distanced themselves from the card, invoking a lawsuit from the card issuers.

While many consumers with conventional bank relationships are well versed on their bank's debit card policies, the target market for prepaid cards - those without banking relationships or those with an adverse credit history - is not always properly educated.

So, what is the truth about prepaid debit cards?

Prepaid Debit Cards vs. Bank Issued Debit Cards

Bank issued debit cards are usually tied to a checking or savings account. When the card is swiped, the amount of the transaction is immediately deducted from the attached checking or savings account.

A prepaid debit card is not tied to a specific checking or savings account. Instead, consumers can "load" a specified amount of money on the card and then use it for transactions until funds are depleted.

Both types of cards are most likely affiliated with MasterCard or Visa and are accepted at merchants who accept those brands. Both types of cards can usually be used to withdraw money from automated teller machines (ATMs).

What is the Cost of Prepaid Debit Cards?

While you are actually spending your own money, there are fees for the convenience of using the card, and the fees can vary greatly. While bank-issued debit cards usually have no upfront fees, prepaid debit cards usually do. The Kardashian Card made headlines for allegedly charging "predatory fees," including a $99.95 purchase fee. Many prepaid debit cards have a more reasonable purchase fee, some as low as $4.95.

There can also be "load fees," a charge for every time you load additional money onto the card. Transaction fees may apply to certain usages.

Fees can be steep, and users should be well aware of when and where charges and fees will apply to card usage. However, when considering the cost of a prepaid debit card versus a credit card, be sure to take into account annual fees, interest rates, over limit fees, and over limit charges. These can add up to much more than even the alleged "predatory" fees charged by some vanity debit cards like the Kardashian Kard.

Pros of Prepaid Debit Cards

There are benefits to prepaid debit cards. Prepaid debit cards can help those trying to get out of debt to manage their expenses. You can only spend what is loaded on the card, and you can track spending. Prepaid debit cards also allow you to make purchases without carrying a large amount of cash. For those without a banking relationship, prepaid debit cards allow the safety of a deposit account while still allowing immediate access to funds. Many prepaid debit cards offer some form of fraud liability against lost or stolen cards. For those unable to obtain credit cards due to financial difficulties and/or poor credit histories, prepaid debit cards offer credit card convenience without a credit check.

Prepaid debit cards can also be useful for college students. The cards allow students to manage their spending, and parents can load money onto the cards remotely

Cons of Prepaid Debit Cards

Just as credit card users need to know their available credit limit, debit card holders must know their available balance. If you try to use the card for a $100 purchase but the card only holds $98, the entire purchase will be declined. Some merchants will allow split transactions, applying $98 to the card and then accepting another form of payment for the balance. However, you must tell the merchant to only charge $98 to the card. The transaction will not automatically split.

Be aware of possible expiration dates to avoid losing money deposited. Some cards may also charge an inactivity fee, a monthly charge applied to the balance if the card is not used within a designated period of time.

Prepaid debit cards can be a beneficial financial tool within a money management plan. Just make sure to understand all the charges and restrictions in order to choose a card that corresponds to your needs.

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