You may have noticed ads for prepaid bank cards that function a bit like a debit card, a bit like a gift card, and a bit like a credit card.
Banks claim these cards are ideal for the 17 million Americans who don’t have traditional checking accounts because they allow you to deposit money, make purchases anywhere Visa and/or Mastercard is accepted, pay bills, access your cash from an ATM, track spending online, and more. You can even set up direct deposit through the card so you can access your paycheck or government benefits (like unemployment) instantly.
The ads are working. Last year, people spent over $200 billion dollars using prepaid cards. That accounts for 5 percent of all retail purchases in the U.S.
What’s so bad about prepaid bank cards?
What the ads don’t mention (or only mention in tiny print) is that these cards carry high fees. Although the fees vary from card to card, you’ll usually be charged a few dollars to activate the card, withdraw money from an ATM, add more money to the card, and so on.
“I’m not a fan of these cards,” says Beverly Harzog, author of The Debt Escape Plan: How to Free Yourself From Credit Card Balances, Boost Your Credit Score, and Live Debt-Free. “You’re paying money to use your own money.”
And while the cards carry the Visa or Mastercard logo, and are accepted anywhere that accepts these cards, they are not credit cards in a traditional sense.
On the one hand, that’s good: you can’t get into credit card debt using these cards. On the other hand, using these cards won’t improve your credit because it is not tracked by any credit bureau.
Related: Credit card alternatives
Don’t believe the hype
Banks also market prepaid cards to parents who are trying to teach their children how to budget money. Beverly doesn’t buy it. “You could use it with a kid who has an allowance, but it’s best to open an account with your child and teach him or her how to use a debit card,” she says.
And what about the banks’ claims that prepaid cards are safer to travel with? Don’t believe the hype. Granted, they’re safer than traveling with cash. But prepaid cards have no better theft and loss protections as credit cards or debit cards. So if you have either of those, there’s no reason to invest in a prepaid card.
Is there ever a time to use a prepaid bank card?
According to Beverly, in general, the cons of these cards outweigh any benefits.
She could only think of one category of people who might benefit from prepaid cards-those who are in the Chex system.
“If you bounce a lot of checks, your bank will enter you in the Chex system,” she says. “If you’re in it, you can’t get a checking account until you improve your credit. A prepaid card can be a temporary solution.”
If you are in the Chex system, don’t get too comfortable using prepaid cards. A traditional checking account will be cheaper in the long run. “You can get out of the Chex system eventually if you pay your bills on time,” Beverly says.
What is the best prepaid card?
If you decide to use a prepaid card, read the fine print. There are always fees with prepaid cards, but they vary greatly. Some cards waive fees if you carry a certain balance. Others give you a few free transactions each month.
“The American Express Bluebird card isn’t so bad,” Beverly says.
The card doesn’t have any activation or reloading fees. You pay a one-time $5 fee when you purchase the starter kit at WalMart. After that, you’ll only be charged $2.50 every time you use an ATM that’s doesn’t have a MoneyPass decal.
Related: How to choose a credit card (smartly)
Prepaid cards are marketed heavily and there’s a reason for that: they carry high fees that banks love to collect. Don’t pay money to use your own money. If you need to use a prepaid card, be careful and move on to other options as soon as you can.
Have you ever used a prepaid card? Did you like it?