Prepaid Debit Cards - Pros and Cons
There are a lot of things consumers aren’t aware of when it comes to prepaid debit cards, so let’s break down the benefits of prepaid cards before covering the cons.
Great for consumers new to credit: If you’re looking for a way to teach your teen or college student how to use credit responsibly, consider setting them up with a prepaid debit card. This way, they’ll get used to tracking their balance and swiping a card, but they won’t be able to get into any sort of credit debt in doing so.
Cardholder Benefits: One cool thing about prepaid debit cards is that in many instances, you’ll become privy to the benefits offered to cardholders. For instance, our favorite prepaid debit card - the American Express® Prepaid Card - includes roadside assistance and global assist in case of emergencies, plus there’s fraud protection and purchase protection. In this case, it seriously pays to carry around an American Express® Prepaid Card since you won’t find the same advantages by simply using cash.
Guaranteed Approval: You’re essentially guaranteed approval on a prepaid card since there’s really no risk for the cardholder. This works out especially great with prepaid debit cards that offer rewards programs, since you’re basically being rewarded for carrying the card at little or no cost to you. (Unless, of course, there’s an annual fee, which some prepaid cards require.) Speaking of rewards...
Rewards Programs: Prepaid debit cards with rewards offer more of an incentive to swipe, in some cases way more than your bank’s credit card. Prepaid credit cards like the UPside Visa® Prepaid Card allow you to earn cash back reward points similar to a normal cash back credit card - essentially, the more you swipe, the more you earn. The monthly fee is small and pretty easily pays for itself in cash back rewards. (See our full list of cash back credit cards on Creditnet.com.)
Setup and Maintenance Fees: These are generally marginal, but maintenance and setup fees on your prepaid debit card CAN add up. Just be aware of your balance to avoid overcharging (no one likes getting ‘Declined’ at the counter), and note the terms of your prepaid debit card to determine whether or not you can waive a setup fee via direct deposit or some other means.
No Credit Line: Prepaid debit cards are just that - debit cards. There’s no credit line offered on these cards, which is why they’re good for training new consumers but bad for bad for building credit. Which means...
You (Basically) Can’t Build Credit with a Prepaid Debit Card: This is the biggest con to prepaid debit cards. Since you’re not offered a credit line, you can’t build your credit. For the most part, these prepaid cards don’t report to the credit bureaus and, of the ones that do, generally it’s not any of the three major creditors. So, while there are certainly some advantages to carrying a prepaid debit card in your pocket (see the pros above), building any meaningful credit is unfortunately not one of them.
If this last con to prepaid debit cards is a deal-breaker for you and you’re more focused on building your credit than anything else, than we would recommend learning more about secured credit cards. Secured credit cards work similar to prepaid debit cards, and the secured credit cards we recommend report to all 3 major credit bureaus.
Check out our full list of recommended secured credit cards on Creditnet.