Prepaid Debit Cards:<br />
Are They Safe?

Since the Great Recession, the popularity of prepaid debit cards has skyrocketed.

Most popular with young people, income tax refund recipients, and the elderly (particularly recipients of social security benefits), prepaid debit cards appear to be a simple alternative to store and access funds. However, many of these cards have more fees than most customers recognize. In fact, these fees are why prepaid debit cards are so profitable.

Customers must pay for buying the card, loading money to the card, purchasing transactions and even for checking their balance. And what about the cards featuring the images of Justin Bieber or Lil Wayne, for example? These cards, also known as vanity cards, charge an additional monthly fee of $4. There is even a fee for not using the card. (That’s right!) If you decide to store money on it but don’t use it, a fee can be assessed. 

Similarly, cards offered by tax refund locations have many fees attached. Most users are unaware of this when their cards are issued.

Interestingly, prepaid cards issued by the government for benefits such as Social Security or SSI are significantly different from the retail cards. Typically, fees are small or non-existent. For example, it’s free to withdraw cash from an ATM (once per deposit period) and access cash at participating banks or credit unions. These cards are far more affordable than regular prepaid cards.

Another serious risk to consider is that prepaid debit cards lack many of the protections offered to users of regular debit or credit cards. Regulation E, the banking rule that allows card users to dispute charges to their account in cases of fraud or theft, does not apply to prepaid debit cards. This means it is more difficult to protect yourself if you lose your card. And even worse, if someone else uses your card, more than likely this money cannot be recovered.

Some credit card companies suggest a prepaid debit card gives people the opportunity to utilize “plastic” particularly if they do not qualify for a credit card or want to avoid over-draft fees. But there are two more affordable alternatives.

First, a debit card tied to a checking account, even a checking account with a monthly fee, is most often a less expensive way of accessing your own money. Secondly, a secured credit card, even for those with a low credit score, is a better alternative because it builds your credit score (unlike most prepaid debit cards).    

While prepaid debit cards may serve a useful purpose in limited cases, it’s advisable that users be very cautious of its high costs and risks. Although the government-issued cards are significantly less expensive, all prepaid cards carry significantly more risks than a traditional debit card linked to a checking account.

It’s easy to think all cards are the same. But the benefits vary wildly. Not being aware of the risks can cost you a lot of money that can be better spent or saved elsewhere.