Payment cards are payment cards–at least that's how a lot of people see things. But with the rising prevalence of prepaid debit cards in the personal finance market, it's important for consumers to realize exactly what these products are and how they differ from credit cards and debit cards–both in terms of the features they offer and the roles they can play in your financial life.
What are Prepaid Cards?
Prepaid cards are a debit-based form of payment that allow users to load funds in a variety of ways and then access their money by making purchases where credit is accepted, asking for cash back at the point of sale, or making withdrawals at ATMs. In this respect, they are much like traditional debit cards.
Make no mistake about it, though–there are key differences. For starters, a prepaid card account will not be accompanied by checks the way a check card generally will. The other primary difference lies in the way you load money (with the exception of direct deposit, which works in similar ways for both products). With a checking account, you can also deposit cash and checks at local bank branches or ATMs or through wire transfers. While a small number of prepaid cards may allow you to use these methods, they also enable you to load funds at retail locations.
Prepaid cards do not build credit
Prepaid cards do not provide a line of credit or offer any sort of loan. As such, they have no impact on credit building. Though there have been calls for prepaid card usage information to be factored into one's credit score, doing so would probably not make sense. A credit score is a numerical manifestation of how responsible one is in managing money loaned to them or paying for services rendered (e.g. electricity, water, and sometimes even housing). Only your own money is in play when it comes to prepaid cards, and you need not make any payments. When funds are used or fees are assessed, they are simply debited against your account balance. So including prepaid card use in credit score calculations would not give prospective lenders much useful insight into your credit habits.
Primary usesHistorically, prepaid cards have been used as alternative to checking accounts for the unbanked and for those who cannot get approved for a traditional checking account due to a history of account mismanagement. This still tends to be the primary use for prepaid cards due to the similarities between prepaid card accounts and checking accounts. Two
of the most common other applications are:
- Financial literacy teaching tool. Prepaid cards can be a good way to give young people experience budgeting, using ATMs and making purchases with payment cards in a low-risk environment. Because you are not given a line of credit with a prepaid card, you aren't able to overdraw your account. For this reason, parents may feel confident loading their children's allowance onto a prepaid card. In addition, parents can use online account management to review their children's spending habits with them.
- Alternative check cashing tool. Many consumers still operate outside the traditional banking system and take their checks to check cashing stores. This can get quite expensive, so choosing a prepaid card that offers the ability to directly deposit checks and that does not charge ATM withdrawal fees is preferable.
What to look for in a prepaid card
It's important to look for a card that charges low fees, but it's also critical to identify the features you want based on your intended use. Once you've narrowed down your options, it will be easier to select the least expensive option.
If you are in the market for an alternative checking account, you should seek a card that offers online bill pay and an extensive ATM network, and that allows you to directly deposit your monthly paycheck. Otherwise, you'll need to pay for a check cashing service or also have a traditional checking account, both of which would defeat the purpose of getting a prepaid card.
If you want a financial literacy teaching tool for your children, it's important to select a card that allows you to load funds via a bank account or PayPal because you probably won't want to directly deposit your paycheck into a child's account or go to a check cashing store every allowance day.
If you are looking for an alternative to a checking account, find a card that allows you to deposit checks directly and that offers an extensive ATM network. Unless you have these features, you will still need to utilize a check cashing store and pay the high associated fees.
Overall, prepaid cards play an increasingly significant role in the personal finance landscape. Even if you don't think it would be the right type of payment card for you, it makes sense to familiarize yourself with the product and its uses.
This content was provided by Odysseas Papadimitriou, CEO of the credit card comparison website, Card Hub and the personal finance social network, Wallet Hub.