What Are Prepaid Debit Cards?

Prepaid debit cards (also known as prepaid credit cards^‡, stored-value cards and reloadable debit cards) are just like credit cards except, as you might have guessed, you prepay or "fill" your account with money before you use the card. You are not extended a line of credit and therefore you do not go into debt and you don't pay any interest charges. In this way, prepaid debit cards are quite different from regular credit cards. But the best part about having a prepaid credit card is that you can use them just like a standard credit card to buy computers, movie rentals, music, or just about anything else a standard credit card can get you.

Prepaid debit cards are great for:

Students who generally don't have an established credit history. Those who have had some debt or credit problems in the past and are finding difficult to obtain a regular credit card. People who simply can't stand the idea of going into debt.

Prepaid Debit Cards: The Advantages

• No Debt: You'll never have debt that accumulates as with standard credit cards. This can mean peace of mind for those who have trouble managing their debt. A prepaid credit card simply stops working once the funds you deposited into it run out.
  
  
• No Interest Charges: You'll never pay any interest charges with a prepaid debit card, a major advantage over standard credit cards. Interest charges can become extremely burdensome, especially for those with high interest credit cards. When it comes to credit card debt: interest charges are the credit card companies' best friend, and the credit consumer's worst enemy.
  
  
• No Exorbitant Fees: Prepaid debit cards aren't free, but you'll never pay an over-the-limit fee, late payment fee or any of the other fees that regular credit cards usually have. That can mean a lot less worry and stress for you.
  
  
• No Credit Checks: You won't be subject to a credit check when you apply for a prepaid debit card, which also means that just about anyone can get approved for a prepaid card.
  
  
• Prepaid Card As A Teaching Tool: A great way for a parent to teach a high school- or college-bound teen about finances and budgeting is to give him or her a prepaid card. Not only can parents monitor their child's spending habits online (most prepaid cards allow you to track transactions via the Internet), students can also learn about the importance of budgeting and spending wisely, without having to worry about hefty interest charges, draconian fees and oppressive debt if a money-related mistake is made.
  
  
• Fraud Protection: Most prepaid debit cards feature the same fraud protection that's offered with standard credit cards. Prepaid card issuers that offer fraud protection generally refund to the cardholder any charges that the cardholder didn't make.
  
  

Prepaid Debit Cards: The Drawbacks

• Setup Fee: With prepaid debit cards, you'll have to pay a setup fee in order to open a prepaid credit card account. The setup fee can be as much as $50 (most prepaid credit cards have a setup fee that is much less than $50.) This might seem high, but it's a one-time fee, and when compared to the fees and interest associated with regular credit cards, it's really not that bad.
  
  
• Automatic Rebilling: Another disadvantage to getting a prepaid debit card is that you may not be able to use a prepaid credit card for transactions that bill your card automatically on a regular basis (recurring payments.)
  
  
• Credit History: You can use a standard credit card to pay for the goods and services you want and need in life. You'll receive a statement every month and you'll either pay the minimum amount due, the total balance due or a sum that is somewhere in between. The payments made to a standard credit card company are recorded, not only by the credit card company but also by one or more of the 3 major credit bureaus: TransUnion, Equifax and Experian. This activity becomes a part of your credit history (also known as your credit profile), and if you've been able to make steady payments on a standard credit card for 2 or more years, your reliable and timely payments become a very attractive part of your credit profile (attractive to the banks and other financial institutions.)
  
  With the vast majority of prepaid debit cards, there is no reporting to the credit bureaus, which means that any and all spending you do with your prepaid credit card will neither add favorably nor detract from your credit profile. If you are the type of person who has trouble managing their debt, then this can be a good thing. However, if you are the type of person who pays bills on time every time, then using a prepaid credit card would be a wasted opportunity to enhance your credit rating.