Here’s the Right Way to Use a Prepaid Debit Card

Jeff J Mitchell/Getty Images

Jeff J Mitchell/Getty Images

An increasing number of U.S. consumers are making prepaid debit cards a part of their financial arsenal. Sixty percent of Americans have used these cards, which function like traditional debit cards but aren’t linked to a bank account, according to a survey by market research firm GfK.

People like prepaid debit cards — also known as general purpose reloadable cards — because they’re easy to use and convenient, GfK’s survey found. But that flexibility comes at a price. All major prepaid cards charge fees of some kind, for everything from activating the card to calling customer service to making withdrawals at an ATM, a recent Bankrate survey revealed.

Some of those charges can be pretty steep. Activation fees may be as high as $9.95, while checking your balance at an ATM can set you back $3. Though certain types of fees have become less common in recent years, like charges for customer service calls, others have increased, particularly those for balance inquiries and declined transactions, Bankrate found.

“If you do want to supplement your finances with a prepaid debit card, it’s best to assess how you plan to use it before choosing a card so that you avoid getting hit with extra fees,” said Bankrate’s chief financial analyst Greg McBride, in a statement.

High fees aside, prepaid debit cards appear to be a permanent feature of the financial landscape. If you have a prepaid card in your wallet, here’s what you need to know about the right — and the wrong — way to use it.

Source: Thinkstock

Source: Thinkstock

1. Don’t load it with your life savings

Prepaid cards are often issued by major banks and branded with the logos of companies like Visa and Mastercard. They look and act much like a regular debit card. But the money on the card may not be protected in the same way that deposits into your savings or checking accounts would be.

Generally, prepaid cards come with fewer protections against fraud and loss than a debit or credit card. If you lose your card or someone steals it, you might still be responsible for the charges, depending on your agreement with the card issuer. Fixing incorrect double charges can also be a hassle. You may not even benefit from FDIC protections, which limit your losses if your bank goes under.

“Right now, there is no required liability protection if a card is lost or stolen or used without authorization,” Susan Weinstock of the Pew Charitable Trusts told CNBC. “Cards that have liability protection include it voluntarily, but it’s not as comprehensive as what is required for checking accounts.”

The Consumer Financial Protection Bureau has proposed new rules that would offer prepaid debit card users many of the same rights that debit or credit card users enjoy, but those changes have not yet been implemented. Until then, it’s probably best to be cautious about putting lots of money on your card.

Source: Thinkstock

Source: Thinkstock

2. Know your fees

Consumer advocates have criticized prepaid debit cards for their onerous and confusing fees. That seems to be changing, albeit slowly.

“Many of the higher fee cards seen in the past have been marginalized or even discontinued, while the newer entrants often have more transparent fee structures and in many cases, avoidable fees,” noted Bankrate’s McBride.

Still, fees are a reality for prepaid debit card users. Before you swipe, make sure you understand what you may be charged. Read the fine print and take steps to sidestep avoidable charges, such as having a linked checking account or using a card that doesn’t charge for in-network ATM withdrawals.

More clarity regarding prepaid debit card fees may be coming soon. The CFPB’s new rules would require card issuers to make clear, up front disclosures about fees that consumers might be charged.

3. Use it to manage your spending

For people who have struggled with debt in the past or have problems with overdrawing bank accounts, prepaid debit cards can be a tool to keep spending under control. “I do it just to do things online because I don’t believe in credit cards either. They just get you in a lot of trouble, and you don’t need [to pay] the interest,” explained one participant in a Pew Charitable Trusts survey about why people use prepaid cards.

“Prepaid card users are trying to regain control of their financial lives, chiefly by avoiding debt, fees, and the possibility of spending beyond their means,” the report’s authors noted. Two-thirds of people surveyed said prepaid cards helped them avoid spending money they didn’t have, and roughly the same number said they helped them stay out of credit card debt.

Prepaid debit cards can also function as an up-to-date alternative to the envelope system of budgeting, in which you allocate a certain amount of money to different spending categories each month. When the money’s gone, you stop shopping. It’s an approach that works for many, but it can be hard to do in a digital world. Dividing funds up among different prepaid cards – or perhaps using a single prepaid card just for discretionary spending – can help you avoid out-of-control credit card bills while still indulging in the occasional online purchase.

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