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Prepaid Debit Cards: Uses & Drawbacks

Instructor: LeRon Haire
The lesson will define prepaid debit cards and explain how they differ from normal debit cards. The lesson will also explain how the prepaid cards are obtained, where they can be used, and several of their advantages and disadvantages.

photo of debit cards

What Is a Prepaid Debit Card?

Today, consumer spending and purchasing help to stimulate the economy. Cash, checks, and money orders are a few examples of methods that consumers can use to make purchases. However, one of the more popular methods of making purchases is using a debit card or a prepaid debit card. But just what is a prepaid debit card? Before we answer that question, let's first define what a debit card is.

A debit card is a card issued through a financial institution that links the consumers checking or savings account directly to the card. A debit card is issued with a Visa, MasterCard, or another major card logo emblazoned on the actual card. A prepaid debit card is similar to a debit card, however, instead of being directly linked with a consumer's checking or savings account, money is pre-loaded on the card so a consumer can only use the amount deposited onto the card.

For example, with a prepaid debit card, if you load or deposit $15 onto the card, then you have $15 to use. The debit and prepaid cards can be considered cousins, but not siblings because of this significant difference. Let's take a look at some of the advantages and disadvantages of prepaid cards along with how they can be acquired.

Advantages of Prepaid Debit Cards

Unlike a debit card, prepaid debit cards are not vulnerable to overdraft fees. As many people may or may not know, overdraft fees have the possibility to grow exponentially and cost the consumer.... literally. Since users can only use what they deposit or place onto a card, there is no danger of acquiring an overdraft fee. In the event that a consumer goes over their limit, they will have a negative balance on the prepaid card but will not incur fees for doing so.

Another benefit of having a prepaid debit card is the fact that a consumer's personal banking information can remain private. A typical debit card is linked to a personal checking and savings account which, when placed into the wrong hands, can possibly lead to identity theft and fraud. Prepaid debit cards are strictly independent and do not require linking with a consumer's bank or financial institution. This bit of information should give consumers piece of mind when deciding on whether they should attempt to obtain a prepaid debit card.

A third advantage of having a prepaid debit card is the fact that it can be used to withdraw money from an ATM. Although the prepaid debit card is not linked directly to consumers' bank or financial institution, they still have the accessibility to withdraw funds from the appropriate ATM if needed. This will certainly be of use for consumers seeking to withdraw funds from their prepaid card. The prepaid debit card also has the capability of receiving direct deposit. For those consumers who desire to keep their banking information private, and still wish to be paid directly into their accounts, the prepaid debit card makes this a possibility.

Disadvantages of Prepaid Debit Cards

One of the first disadvantages of having a prepaid debit card is the fact that since the money is not linked to a savings or checking account, it is not gaining any interest. For example, when using a typical debit card, the funds are being held in a consumer's account where it can gain interest. Once your money is loaded onto a prepaid debit card, it does not gain interest, particularly since it is not linked to a direct account held by a financial institution. Simply stated, this means that with a prepaid debit card, you are working for your money, but your money is not working for you.

A second disadvantage to having a prepaid debit card is the fact that consumers may possibly lose their deposited funds due to inactivity. Inactivity is when a consumer has money loaded onto his card but the card is not used for a specific amount of time. For example, if you have $50 loaded onto your prepaid debit card on January 1st and you do not use your card again until April 20th, there is a possibility that the funds may either be lower than $50 or completely gone. Several prepaid debit cards have regulations which require the consumer to actively use the card or risk the possibility of losing funds, for any consecutive weeks or months of inactivity.

Although prepaid debit cards are typically not prone to overdraft fees, they are subject to several other fees that are not associated with debit cards. Besides the possible fees mentioned for inactivity, there may also be activation fees that are often a part of obtaining a prepaid debit card. Prepaid debit cards run the risk of charging users for simply checking their balance at an ATM, or even charging fees for depositing money onto their card.

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