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Pros & Cons of Prepaid Debit Cards

12 February 2010 4 Comments

Many consumers are wary of traditional banking and are opting for a non-traditional approach to handling money. One of these options is using a cash-only based system, rather than using a checking/savings account or credit. This cash based system allows the individual to know exactly how much money they have at any given time, and prohibits a financial institution from charging fees. However, typically using a cash only system will prohibit the user from making “plastic” transactions; for example credit card or debit card transactions. One solution is to use a prepaid debit card, like ones from ACE Cash Express. Prepaid debit cards are incredibly similar to a regular debit card, but there are some notable advantages and disadvantages that a user should be aware of before considering this option.

Pros

  • No minimum balance or transfer required. Unlike a bank, usually in order for the customer to avoid fees the bank will require the customer to maintain a minimum balance or deposit a certain amount each month. A prepaid debit card does not require a minimum balance.
  • Accepted at retailers, businesses, and online. A prepaid debit card is treated just like a regular debit card that is linked to a checking or savings account. Prepaid debit cards will allow the customer to set a PIN to authorize transactions as well.
  • Link with direct deposit. The ability of having direct deposit on a prepaid debit card is dependent on the retailer the customer chooses to go with to purchase the prepaid debit card. Most retailers will offer this service so that a paycheck can be automatically loaded onto the prepaid debit card, similar to a checking account.
  • Used at ATMs and can receive cash back. Similar to the use of a traditional debit card, these can also be used at ATMs or can receive cash back made on purchases at retailers that offer cash back to their customers (such as the grocery store).
  • Will not allow go over balance. Prepaid debit cards will not allow a user to go over the balance on the card. Also, because of this, a prepaid debit card will not charge any overdraft fees or over-limit fees unlike banks and credit card companies. Often banks and credit card companies will allow a customer to spend over their limit because ultimately the bank or credit card company benefits from these transactions.

Cons

  • Fees involved. Prepaid debit cards will have an initial activation fee involved in the purchase of the card. It is also possible for the retailer to charge a fee every time the card is reloaded and for providing services such as direct deposit. These fees are often more than what would typically be charged with a checking or savings account. The charge of these fees should be placed into consideration when it comes to purchasing these prepaid debit cards.
  • Cannot be linked to another account. Unlike a debit card linked to a checking account, if a customer spends over their limit, the card will either draw money from a savings account or credit card. If a customer using a prepaid debit card makes a purchase that is greater than the existing balance on the card, the transaction will simply be declined. It is important for the user of the prepaid debit card to keep track of the balance in order to avoid an embarrassing situation.

For me, the more individuals lean towards a cash-based approach to personal finance, I think it’s a great thing.  Most people rely entirely too much on credit and would be much better off if their magic plastic card declined their purchases when they ran out of money versus adding to their debt.  A tool such as a prepaid debit card might be a good way to assist you with your budgeting and financial planning.

As with anything, make sure you do extensive research on the advantages and disadvantages of the product prior to committing to it.

4 Comments »

  • Joseph Sullivan said:

    Here’s my take on Prepaid Debit Cards (payroll cards) based on my own experience:

    I used to work at a large national restaurant chain and our card was pretty bad. But, from what I hear, it was typical because most cards either have a monthly fee or pretty limited as to the free items. I have worked at Starbucks for about 7 months now and they allow us to have a card called the Money Manager Card. The choice was pretty simple because there are no monthly fees, I can use it on their network (allpoint atms) free at all times, never any fees to buy things (signing or using my PIN and getting cash back if I want…all without a fee or surcharge), no overdraft. Let’s just say I haven’t paid a fee in the entire time I’ve had the card. It’s pretty simple to use it at no charge and I really don’t have to tip-toe around any limited free items like most other cards I have seen have.

    Oh, and don’t lose most payroll cards! If you do, it’ll cost you $$ even to get the replacement sent by the post office. My new card give free replacements when delivered by the post office all of the time. Or, if I want, I can get it delivered by Fedex for $10. Pretty reasonable as I sent something by Fedex a month ago and paid $14!

    My point is, if an employer is set on offering its employees a Paycard, it should do both the company and its employees and offer a Paycard that truly costs $0 to use. When I say $0, I mean $0. Not just $0 if you jump through certain hoops, etc.

    I should state that Walmart has something that is similar sounding to Money Manager Card. I think it is the Money Card or something like that. That card is definitely not the same.

    I did a quick Google search on Money Card when investigating the Starbucks offering and mistakenly clicked on a link to a Money Card “problem” page where people complained about it. Then, I realized that “Money Card” is not “Money Manager Card”.

    Thought I would let you know so you don’t make the same mistake and get yourself a card that will end up costing you $$$$.

  • Welfred said:

    Thanks a lot for this very source full information. it really help me a lot. I am applying for a debit cards. this article it helps me. thanks.

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