Prepaid debit cards: Big fees, small perks

There’s a new kind of plastic in town. Prepaid debit cards are becoming increasingly more common on college campuses and elsewhere as credit card companies look for ways to add new customers without extending credit to risky consumers with no credit history or past credit problems. Prepaid debit cards solve that problem for card issuers, but they give consumers few benefits at all.

What is a prepaid debit card?

A prepaid debit card similar to a gift card—you “charge” the card by depositing funds on it. As you spend with the card, your balance is depleted until you reach zero or reload it. Prepaid debit cards can be used anywhere MasterCard and Visa are accepted—including to make cash withdrawals at ATMs. But there’s another critical difference: Prepaid debit cards are loaded with fees that gift cards are often not allowed to have by law including activation fees, loading fees, monthly fees, and withdrawal fees.

What’s good about prepaid debit cards

To be fair, prepaid debit cards are one way to manage your budget—you can never incur and overdraft fee or go into debt because. On the other hand, you can avoid a lot of fees by learning to use a credit or debit card responsibly. And for those who can’t get approved for a credit card or can’t resist going into debt, a secured credit card offers many of the same benefits as prepaid credit cards, but sometimes with few fees and the added benefit of helping you build a credit history. (Prepaid debit cards do not build credit history).

What’s no-so-good about prepaid debit cards

In addition to all the fees, prepaid debit cards often require you deposit funds with a bank account or another credit or debit card (so you can’t deposit cash or a check directly to the card’s account). Even worse, prepaid debit cards offer fewer consumer protections than credit or debit cards, meaning if your card is stolen and used, it’s more likely you’ll never see that money again.

The details on two prepaid debit cards

Facecard is one prepaid debit card marketed to college students and other younger users. The card lets members track spending online and via cell phone and even exchange money with other cardholders, but there’s a cost. The Facecard has a $1.50 ATM withdrawal fee (plus fees charged by the ATM) and a $4.95 monthly inactivity fee if the account is unused for 90 days. (Many states make it illegal for the issuers of gift cards to charge inactivity fees that will essentially eat away the entire account balance over time).

Wal-Mart offers the Student Money Card. Parents can track student spending on the account and also add funds at any time. The Student Money Card has a $7.46 activation fee and a $4.94 monthly fee for any balance under $1,000. There is a $2.00 ATM withdrawal fee (plus fees charged by the ATM). Cardholders can avoid fees by getting up to $100 cash back with a purchase at a Wal-Mart store.

There are a few prepaid debit cards offering lower fees. With direct deposit, some only charge for ATM transactions. Compare our top prepaid debit car picks now »