It’s the fastest growing banking product these days: the prepaid debit card. They’re serving as the bridge for millions of Americans picking up the pieces of their financial lives and they’re being used as teaching tools for parents wishing to educate their teens about proper financial behaviors. Celebrities are endorsing them and these companies are spending millions every year in advertising efforts. Before you shop for one of these prepaid products, here are a few things you should know.

Prepaid debit cards are a great alternative to checking accounts. The fees are generally low – though like most other things, it’s not hard to get scammed. If a checking account is out of reach, it can be the best option. If you’re looking for a prepaid card with no fees, you’re going to be disappointed. There are none that have no fee structures – it’s the fees that serve as the profits for these companies.

There’s also a convenience factor for many. It’s little surprise the numbers are almost even between prepaid cards and conventional checking accounts in rural areas and even low income areas. Bank branches can sometimes be miles away, but a prepaid debit card is often more accessible for some. They can easily be found in retail and convenience stores, so it stands to reason they’re better choice, not to mention the only choice for those who are considered unbankable.

7 Popular Prepaid Cards Special Benefits More Details
Pink ACE Elite™ Visa® Prepaid Card Supports National Breast Cancer Foundation; Free Direct Deposit; Tax Refund Card; FDIC Insured. Details
PayPal™ Prepaid MasterCard® Free Direct Deposit; Links to PayPal Account; Cash Back Rewards; FDIC Insured Savings Account (Optional). Details
READYdebit® Visa® Prepaid Card Instant Account Number; Free Credit ScoreTracker; Tax Refund Card; Online Bill Payment. Details
Baby Phat Prepaid Visa® RushCard Free Direct Deposit; Tax Refund Card; Easy Bill Pay; FDIC Insured. Details
Ally Checking Debit MasterCard® Card Free Checks and Balance Alerts; Money Back With Ally Perks; No ATM Fees Nationwide. Details
American Express® Prepaid Card Free Direct Deposit; Fraud Protection; Purchase Protection & Roadside Assistance. Details
Green Dot® Prepaid MasterCard® Free Direct Deposit; Tax Refund Card; Access 20,000+ MoneyPass® ATMs. Details

Another relatively new dynamic associated with these prepaid products is the absence of fees with some ATM withdrawals. Generally, the larger the network, the better the odds that a consumer won’t have to pay $2 or $3 or more in fees. That doesn’t mean the bank that hosts the ATM won’t have its own fees. One example is the Green Dot prepaid card. It allows its customers the option of withdrawing from more than 20,000 ATMs at no cost. Not all have these big networks, though. Again, do your homework. It’s the only way to ensure you know exactly what you’re getting into.

There are other fees, though and it’s important for consumers to carefully review those fee schedules. Some can add up to $400 a year in monthly access fees, reloading fees, ATM fees and even fees to speak to a live customer service representative. Others have bill payment fees and decline fees – just to name a few.

Analysts still say if you have a choice between a checking account and prepaid debit card, your best bet is likely going to be the checking account. The fee structures are usually lower and you have the support of a community bank. Plus, as long as you’re in their network, you don’t have to worry so much about excessive ATM fees and you won’t have to worry about fees for a phone call to speak to a live rep. Take into consideration your own unique needs. For instance, are you close enough to a bank branch? Does it offer direct deposit? Is online banking an option? Most all are – and most all prepaid debit cards have online dashboards.

Also, keep in mind that no matter how well you handle your prepaid card, it’s never going to help you with your credit scores. You’re not using anyone else’s money, so there’s no one to report your payment history to the credit bureaus. Even though a bank’s not going to report your good money habits, it will report your bad money habits, especially if it closes your account due to overdraft fees or other bad money habits. Overdraft fees aren’t a concern with prepaid cards since you can’t spend more than what’s available. That said, your bank is in a position to lend whereas a prepaid debit card network isn’t, so there’s a lot to take into consideration, especially if you’re thinking long term for your financial health.

Wondering what the difference is between prepaid cards and the debit cards your bank issues as part of your checking account? It’s quite simple – prepaid cards offer no protection if your card is used fraudulently or if something you purchase with your prepaid card turns out to be a lemon. Your bank card, on the other hand, usually comes with the same protections a traditional credit card offers. Some even offer life insurance if you die – and these are just not part of a prepaid card’s offerings. While bank accounts are required to cover certain losses in the case of fraud, theft or error, the same legal protections generally don’t extend to prepaid cards, according to Consumers Union.

The prepaid cards also lack something else very important: government protection. They don’t have the same FDIC backing as banks offer, so it’s important to keep that in mind as you go through the process.

Ultimately, it’s going to come down to what best serves yours and your family’s purposes. Due diligence is a must as you seek out the best financial products for your needs.

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