Prepaid Debit Cards

What Are the Pros, Cons and Alternatives

Currently, consumers have approximately 7 million active prepaid debit card accounts. That's up from about 3.5 million active accounts in 2009. The federal Consumer Financial Protection Bureau also projects average growth of money loaded onto these cards at 42% annually from 2010 to 2014.

Many consumers see the cards as a convenient way to use "plastic" for regular spending without a traditional checking account debit card's potential risk of exposure of funds to fraud. However, prepaid debit cards also have significant drawbacks—they are typically loaded with fees and do not have the protection of consumer laws that apply to traditional checking account debit cards and credit cards. This brief summary of pros, cons, and possible alternatives can help you decide what's right for you.

What Is a Prepaid Debit Card?

Advertising and promotions for prepaid cards may call them prepaid cards, prepaid debit cards, or prepaid credit cards. In the financial industry, they are known as "general purpose reloadable prepaid cards" or "GPR prepaid cards." Because you load the card with your money (not money from some other source), they function as prepaid debit cards. That's the term we'll use in this report.

Prepaid debit cards may be branded with logos of one of the major card networks such as Visa, Mastercard, American Express or Discover. Some prepaid debit cards carry only the issuing institution such as retail stores, check cashers, media networks, or even celebrities. Most cards can be reloaded by direct deposit from a bank account or by buying a "reload" package at a retailer. Some issuers are marketing their cards as a convenient place to direct deposit paychecks. The issuers of many cards may promise protection against theft of funds but prepaid debit cards are not yet protected by financial regulations. The Consumer Financial Protection Bureau, however, is currently considering regulations for such cards.

Here's what prepaid debit cards (GPR cards) are not:

Potential Benefits of Prepaid Debit Cards

Common reasons given for using or promoting prepaid debit cards include:

Significant Drawbacks of Prepaid Debit Cards

Although there may be good uses for prepaid debit cards in certain circumstances, personal finance experts have identified significant drawbacks to consider before opting to use such a card and before selecting a specific card. After investigating a number of cards in a March 2012 report, Consumer Reports judged "prepaid cards a shaky alternative to a bank account with a debit card."Drawbacks to the cards include:

Alternatives to Prepaid Debit Cards

Personal finance experts find that for most purposes wise use of traditional debit cards and credit cards provides more protection, costs less, and provides more means to combat fraud. There are also other alternates that can provide most of the benefits claimed for the prepaid debit card.

Making the Choice Right for You. As you consider your particular needs together with the pros and cons of prepaid debit cards, you may opt to try a prepaid debit card. If so, make sure that you carefully compare costs and options to select the card best for your needs. The following resources may be helpful.

For More Information