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Prepaid Debit Cards: the Pros and Cons

Prepaid Debit Cards

When it comes to prepaid debit cards, there are usually two schools of thought: they’re the ideal alternative to a bank account or they’re risky financial products with too many fees. Both are accurate, for the most part. Like all things financial, there’s always a focus for the financial institutions on the bottom line. Fortunately, many are beginning to see that they can turn profits without gouging the collective American consumer. So are they right for you? Take a look and see for yourself if this will fill a gap in your financial toolbox.


Prepaid cards are also referred to as GPR, or general purpose reloadable cards. Currently, there’s close to eight million American consumers who are carrying and using prepaid debit cards. Of course, they they look and work in the same way as our debit cards linked to our bank accounts do, and many are even offering rewards programs.

With many American consumers who are either unbanked or underbanked, it’s a logical transition for those who need a way to conduct their financial business. They’re convenient, usually can be used overseas and they’re easy to set up. Many use them as a financial teaching tool for their kids or college bound young adults and others prefer to have a prepaid card for their online purchases so that they’re not putting their banking information into cyberspace.

But no two prepaid cards are the same and the fee structures can vary greatly. That, however, is likely to improve since the Consumer Financial Protection Bureau is looking for ways to better protect consumers from excessive fees. Plus, there are a lot of new products on the market that are giving those who charge high fees a run for their money.

Prepaid Debit Cards or Secured Cards?

Some often are confused about the differences in secured credit cards and prepaid cards. Prepaid cards don’t affect your credit rating since you can only spend what you have available on your card – that’s loaded with your own money. Secured cards are issued to consumers who pledge collateral in the form of a savings account, so they’re using the bank’s money. That means the bank reports the payment history and other information to the three credit bureaus, in turn allowing a consumer to build or rebuild his credit.

Regulation Lacking

There’s another important element that should be factored in when considering a prepaid credit card. They’re not regulated yet. Again, CFPB is seeking out new ways to limit predatory companies’ efforts of gouging consumers, but it’s still being hashed out. The government watchdog group had accepted public input last summer and since then, it’s been in the due diligence stages. The goal is to define new rules for these general purpose reloadable cards – and the rules could be coming sooner rather than later. There’s a definite risk because of the lack of regulation. There are banks that actually target those with no or poor credit and who don’t qualify for checking accounts – that’s a red flag and another reason for due diligence.

Still, for those who are looking for a prepaid card, there are things to look out for to avoid choosing one of the higher fee structures. Also, prepaid cards usually aren’t used with the idea that it’ll be their only option over the years. Many transition to traditional bank accounts at some point, usually after their credit has improved. That might not seem like a significant detail, but if you approach it that way, you’ll be able to keep the fees in perspective.

Below, you’ll find a couple of the better prepaid credit card offers. You can apply online, too.

American Express Serve

American Express, in recent years, has introduced several new products in the prepaid market, including Serve. It’s easy to get the process moving and there’s no credit check. Because it is a prepaid card, there are no annual fees or interest rates either. There’s a great mobile app, too. It allows card members to stay on top of their finances. Set up the text or email alerts to let you know when there’s been activity on your card – if for some reason it was stolen, you’ll be in a better position to stop it before it gets too bad.

With Serve, you can also link your other financial accounts if you choose, including bank accounts, MoneyPak or PayPal. One of the most impressive features is the insider access you’ll enjoy, including Purchase Protection, Roadside Assistance and Entertainment Access.

Also – and perhaps most importantly – the fees are low and your first month’s fee is waived. Around the clock customer service sweetens the deal further.

You can take your Serve to the social level, too. Money can be sent or requested with a Facebook wall post.

ACE Elite Visa Prepaid Card

ACE Elite Visa too is a prepaid product focused on customer care. No worries about overdraft fees or APR and your ACE is FDIC insured – some prepaid cards aren’t. There’s a small monthly fee but your PIN and signature purchases never incur any kind of fee.

Use it like you would a traditional credit card for your online and offline purchases, online bill pay, car rentals, airfare and anywhere else Visa is accepted. There are no application fees, a low fee structure, access to ATMs, free account to account transfers and complimentary additional cards if you need them.

Another feature is being offered for a limited time and that’s the NetSpend National Savings with an APY of 5% – that alone makes this a powerful choice. Compare it to the other similar products before you decide so that you’re making a decision based on knowledge.

Finally, there’s no credit check, but you will enjoy free direct deposit, an optional complimentary savings account and unlimited purchase transactions. There’s much more to this and the American Express Serve products – be sure to explore all of the benefits and perks, but don’t forget the terms and conditions – it’s crucial.

Brand Loyalty

As these cards grow in popularity, consumers are remaining loyal to those financial entities. The consumer who trusts is far more likely to put to use other financial products offered by the bank or prepaid company. As we mentioned, the big drawback is the absence of credit bureau reporting. If these tides ever shift, odds are, we’ll begin seeing these as the preferred method of spending. It’s not likely to happy, though, considering there’s no financial activity to report – the funds on these cards are the customer’s.

It’s clear that prepaid debit cards have a place in the financial industry. Despite those who say otherwise, the many benefits consumers enjoy can’t be ignored. Not only that, but for so many of our financial transactions these days, a checking account or debit card is a must. These products have filled a growing gap between those with access to traditional banking products and those who don’t.

Do you own a prepaid credit card? Has it been a convenience in your financial activities or do you have it as backup? Let us know your thoughts on the future of prepaid cards. Also – if you have a college student in your family, did you send him off with a prepaid debit card?

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