Prepaid debit cards are marketed as a solution to all kinds of financial needs, from getting paid by your employer to paying the bills to shopping online. But often, a prepaid debit card is not the only solution to these problems, nor is it the best solution. Here are six situations where a prepaid debit card might seem like a good idea, but it really isn't necessary. (For related reading, also take a look at 8 Ways To Avoid Getting Burned By Prepaid Debit Cards.)
TUTORIAL: Credit Card And Debt Management Tips
Giving a Gift
Some people may feel that in this electronic age, it has become outdated or even tacky to give cash or a check as a gift. Your gift recipient will be happy to receive cash in any form, though, especially a form that they know what to do with. Not everyone is familiar with prepaid debit cards, so instead of giving a gift card that essentially comes with a complex user's manual of terms, conditions and fees, give something simple and hassle-free like a traditional gift card, e-gift card, cash or check.
Paying the Kids an Allowance
The purpose of giving kids an allowance is to teach them something about money management, right? If that's your goal, you will want to make the experience as real and as hands-on as possible. Studies show that it is more psychologically painful to part with cash than to swipe a card, so by paying an allowance in cash, it will make spending money feel more real to your kids than swiping a card, where they never see money change hands. If your concern is keeping track of how your child spends the money, make it a policy that they have to give you their receipts for every purchase, or they won't get an allowance.
Getting Your Tax Refund
If you have a bank account, there is no reason whatsoever to have your tax refund placed on a prepaid debit card - you can have your refund directly deposited to your account, or receive a check that you deposit yourself. If the problem is that you don't have a checking account and you want to avoid paying expensive check cashing fees, there's a better way: you can cash tax refund checks (as well as government checks and official payroll checks) at Walmart for a maximum fee of $6 (if your check is for $1,000 or less, the fee is only $3).
Avoiding Monthly Bank Fees
Some checking accounts have a bevy of fees that rival those of prepaid debit cards. Your checking account might charge you a monthly fee, a low balance fee, overdraft fees, extended overdrawn balance fees and non-sufficient funds fees. All of these can be avoided by carefully managing your account - except, in some cases, the monthly fee. However, as common as monthly fees are at brick-and-mortar banks like Chase and Wells Fargo, you can avoid them by switching to an online-only bank or, if you need in-person services, a credit union. (To learn about making the switch, read How To Break Up With Your Bank.)
TUTORIAL: What To Know About Credit Cards
Limiting Your Spending
It's true that you can't spend more than the balance of a prepaid debit card, and this balance might be considerably lower than the limit on your credit card. However, you don't need a prepaid debit card to force you to limit your spending. If you have a checking account, you can pay for purchases with your debit card - though you will have to stay on top of your balance to avoid overdrafts.
You can also restrict your access to your money in more productive way by putting your savings in an account that you can easily access in an emergency, but that will be more difficult to withdraw money from than a checking account. A certificate of deposit is a good option: you'll earn interest on your deposit, and you can withdraw your money if you need it, but if you take anything out before the CD matures, you'll have to forfeit some of the interest you've earned.
If you don't have a debit card, or don't want to pay for purchases that way, you can use a cash budgeting method such as the cash envelope method. This involves dividing your cashed paycheck into envelopes for groceries and other monthly expenses, then not spending more than you've placed in the envelope. (See Debit Card Fraud: Is Your Money At Risk? to learn why debit card spending can be problematic.)
It's definitely easier to shop online if you have a credit card. However, you can also buy a store gift card with cash, then use the gift card to shop online. Another option is to ask a friend or relative who has a credit card to make the purchase for you, and pay them immediately with cash. At some stores, you can ask a store employee to help you order an online item, and pay the store in cash since you're there in person.
Another option is to shop with one of the 1000-plus merchants that offer a payment service called Bill Me Later, which only requires your name, address, phone number, birth date and last four digits of your Social Security number at the time of purchase. You can pay your bill with a checking account, savings account or money order. Even though you may have to pay a fee to obtain a money order, by consolidating your purchases with one creditor, Bill Me Later, you will only have to purchase the occasional money order to pay off your balance and, unlike prepaid debit cards, money orders only have highly visible, up-front fees.
The Bottom Line
It's true that prepaid debit cards can be beneficial for consumers who are savvy enough to read and understand the terms and conditions and avoid incurring numerous fees - for example, getting a paycheck deposited to one of these cards can save lots of money if you normally have to pay fees to cash your paycheck at a check-cashing store. However, for many of the supposed conveniences these cards are marketed for, prepaid debit cards can actually make your finances more complicated.
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