People with damaged credit or bad spending habits will try anything to protect themselves from poor decisions. Of course, there is always some corporation there ready and willing to offer you a product marketed to look like something that can help you. Enter the prepaid debit card. The prepaid debit card can be used anywhere a credit card can be used. You can only use the funds that have been deposited into the account attached to the card and it can be replenished at any time. The reason why this type of card is sold at all is because of the perceived theory that people with bad credit can only qualify for this and that it will help build and repair a person’s credit.
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These are two ideas that are not true and the companies that provide them do little to inform you of this. A prepaid debit card does little, if anything, to help repair anybody’s credit. The credit agency look to see how a person does while borrowing funds or dealing with “credit” from an institution. These cards do not act in any way that helps establish the ability to do just that.
The problem with prepaid debit cards
In most cases, there is no need to “qualify” for these cards. There is no credit check of any kind to obtain this card and there is no interest charged on any unpaid balances. Since they are filled with your funds, they are no different than carrying cash in your pockets. There is such a thing, however, as a secured credit card that CAN help build your credit.
Secured credit cards are available to anybody, regardless of their credit history. The limits are low and a collateral payment is often required to “secure” it. This WILL help repair those bad credit histories as long as the owner makes all of their payments on time.
Prepaid debit cards are not required to be FDIC insured. A potential user of this product should make sure the company that they plan to purchase one from has a solid credit history themselves. Also, many of these cards are “unregistered” in that there is no name, address, birth date or social security number that is connected to it. If a person was to lose that card, all the funds would be lost as well.
Prepaid debit cards have been able to avoid government regulators for the most part, so they can be a dangerous choice to the un-educated. The majority of the time, the fees on these cards can be higher than if an individual had a regular checking account with a standard debit card. There are usage fees, monthly fees, inactivity fees and ATM fees that suck your money before you ever slide that card in the machine at your local coffee shop.
What are the alternatives to prepaid debit cards?
The previously mentioned secured credit card is an option for those with no or bad credit. For those with some credit, a standard unsecured credit card can continue to help build that foundation for better rates in the future.
If the concern is over-extending on a credit card again, there is no reason why a standard checking account with a debit card can’t answer all of the same needs as the Prepaid Debit Card. When you look at the fees and do the math, in most cases it really is cheaper to go that route.
In a worst case scenario, a pocket full of cash will save you the fees even if it has some of the same dangers of losing it like the card. There are very few reasons in which using this type of card makes sense.
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