Pros and Cons of Prepaid Debit Cards

Find out if reloadable debit cards are a good choice for you.

Prepaid debit cards work much just like bank debit cards except they’re not linked to bank accounts. You load a prepaid debit card with money and as you spend, the money is deducted from your balance. Once your balance is depleted, you must reload cash on the card to use it again.

Prepaid cards are often backed by big companies — for instance, you can get a prepaid Visa card or a prepaid MasterCard. Other options include a Green Dot prepaid card or a PayPal prepaid card.

Whether you go with a Visa prepaid card or some other kind of prepaid debit card, know that most work well for some, but might not be right for you. Explore the advantages and disadvantages of prepaid debit cards, then choose what’s best for your financial plan.

Prepaid Debit Card Pros

Prepaid cards have become a U.S. mainstream payment instrument and are no longer just for those who don’t have bank accounts, according to NBC News. Here are five advantages to using a prepaid card:

  • No credit check: Prepaid cards don’t require a credit check. They might be a good option if you have bad or poor credit.
  • No risk of overdrawing: You cannot overdraw a prepaid debit card. If you don’t have the money in your account to pay for something, the transaction will be declined.
  • Works like cash: Using prepaid cards is like using cash. If you lose your cash, you’re out of luck. If you lose a prepaid card or it’s stolen, however, no one can use it without knowing your pin number.
  • Convenient to reload: Reloadable prepaid cards enable you to add funds in a number of ways: via direct deposit, transfers from your checking account, purchasing a “reload pack” or adding funds at the card issuer’s institution or certain retail locations.
  • No credit risk: Debit and prepaid debit card activity isn’t reported to the three major credit like credit card activity, so you don’t have to worry about credit dings.

Find Out: 6 Times Your Debit Card Is Better Than Your Credit Card

Prepaid Debit Card Cons

Like most things in life, prepaid cards have a downside. Weigh these five cons against the pros before you decide if a prepaid card is for you:

  • Multiple fees: Prepaid debit cards typically charge fees, including charges for activation, ATM withdrawals and more. The list of free prepaid debit cards is short, but you can find some with few fees. For instance, the Walmart prepaid card offer users free online purchases and free direct deposit.
  • No credit building: Although a prepaid card can’t hurt your credit report, it also won’t help you rebuild it. Credit bureaus don’t include prepaid debit card history when calculating your credit score.
  • Less security: The kind of protection you get against fraud and unauthorized charges on your prepaid card varies among card issuers; some card providers have stronger protection than others.
  • Lack of insurance: The Consumer Credit Act doesn’t cover prepaid cards, so you aren’t protected if something goes wrong when you purchase goods or services. For instance, if you buy something with your card online and you don’t receive the item, your money is gone.
  • No FDIC Insurance: If your bank fails, the government guarantees up to $250,000 of your money in an individual bank account. The same cannot be said for money on a prepaid debit card. The best prepaid cards might be eligible for FDIC “pass-through insurance,” but they must meet certain qualifications.

See: 15 Best Debit Card Rewards Programs

Although you might be tempted by a prepaid card’s convenience and ease of use, don’t forget that you won’t be able to build your credit with one or enjoy typical safety features associated with bank account cards. Before you decide if a prepaid card is right for you, consider all the pros and cons — if it seems like a prepaid debit card is right for your financial strategy, do your homework so you can you get the best prepaid debit card available.