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Prepaid debit cards are by far the most popular type of payment card. In our look at credit and debit card market shares, prepaid cards made up just under 72% of the cards used in the United States as of 2018. That meant there were around 5 billion prepaid cards out there.
It's easy to see why. You can get a prepaid card, load it with money, and use it in minutes. There's no application process like there is with bank accounts and credit cards, making prepaid cards extremely convenient.
There are, however, a few notable problems with prepaid cards. If you currently only use prepaid debit cards, here's why you should reconsider.
1. You'll pay unnecessary fees
Fees are common with prepaid debit cards. The exact fees depend on the card you choose, and may include:
- Monthly fees
- Activation fees
- ATM withdrawal fees
- Reload fees
- Foreign transaction fees (for prepaid cards that work internationally)
There are prepaid cards with very few fees, such as the Bluebird® American Express® Prepaid Debit Card or the Walmart MoneyCard. But just about all prepaid cards have at least one or two fees.
On the other hand, there are bank accounts that don't charge any fees. You'd likely save money this way compared to using a prepaid card.
2. You won't build your credit score
When you use a prepaid card, nothing gets reported to the credit bureaus. You're only spending your money that you previously loaded to the card, so it doesn't help your credit score.
You could build your credit if you paid by credit card. When you use a credit card, you're borrowing money to pay for the purchase. The card issuer will report the card's activity to the credit bureaus. If you pay on time, that will be a positive factor for your credit.
This is one of the main reasons why it's smart to use a credit card regularly. It will increase your credit score, a benefit you'll miss out on with prepaid cards.
3. You probably won't earn interest or rewards
Both bank accounts and credit cards have ways of providing value for account holders:
- Most bank accounts offer interest. Although interest rates typically aren't that impressive, high-yield savings accounts are an exception.
- Rewards credit cards offer either cash back or points on your purchases.
By combining these, you can maximize your money. You simply store your savings in a high-yield savings account to earn interest and pay for purchases with a rewards card. If you have good credit, you can also take advantage of credit card bonuses.
Interest on your balance and purchase rewards are two features most prepaid cards don't have. There are exceptions, but prepaid cards that offer interest or rewards also tend to charge more fees. Those fees cut into the value you get from your card.
4. Your money may not be as secure
The good news about prepaid debit cards is that you do have protection against unauthorized charges under federal law, just like you would with a debit card for a bank account. You do need to contact your card issuer immediately if your prepaid card is lost or stolen. If you wait too long, it could affect your liability for unauthorized charges.
You only qualify for these protections if you register your prepaid card, though. To register your card, you must provide certain personal information to the card issuer. You can typically do this online.
If you don't register your prepaid card, then you won't have those fraud protections. You also may not be able to get your money back if you lose your card.
Keep in mind also that not all prepaid debit card issuers are insured by the Federal Deposit Insurance Corporation (FDIC). FDIC insurance, which protects you in the event of a bank failure, is standard with most bank accounts.
Prepaid cards aren't all you need
While prepaid cards have their uses, don't let their convenience convince you that you don't need a bank account or credit card. There are still several areas where those other financial tools have major advantages.