Prepaid debit cards are marketed as a solution for people who don't have checking accounts or can't get approved for a credit card. They are also given as gifts by people who want to essentially give cash. However, these cards have many differences from traditional debit and credit cards that can cost you money if you don't know what to watch out for. Here's how to avoid unexpected fees and other problems that can arise when using a prepaid debit card.
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Read the Fine Print
Some cards charge a monthly fee that will quickly eat away at your balance. There may also be a fee to withdraw cash at an ATM, a fee for not using the card, a fee to activate the card and more. The Visa RushCard, for example, has a one-time card fee ranging from $3.95 to $14.95, a monthly fee of $9.95 (if you sign up for the card's monthly plan rather than its pay-as-you-go plan) and a fee of $1.00 to make a purchase using your PIN number. Those are only three of the possible fees users could incur with just this card.
Watch Out for Chargebacks
Some retailers don't accept these cards - though they may appear to at the time of your purchase. If the charge is later declined, you could find yourself suddenly on the hook for a purchase that you thought was already paid for. This happened to a customer who tried to use a Green Dot prepaid debit card to purchase several songs from iTunes. Normally, iTunes will decline a card as soon as the user enters his or her billing information if there is a problem. In this case, the customer successfully purchased several songs using the prepaid debit card, but the next time she logged into her iTunes account, she discovered that the charges had been declined and she had a debt to Apple, which she ended up paying with a regular credit card.
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Monitor Your Card Activity
Prepaid debit cards don't automatically issue statements like credit and debit cards, so you need another way to keep track of your spending. To keep track of your purchases and your balance, it is usually possible to register your card through the issuer's website and view your card activity online.
As far as balance-checking fees, here is one example of what you might encounter. The NetSpend prepaid Visa debit card does not charge a fee for what it calls "Non-Monetary Transactions - Via Internet," but it charges up to 50 cents for "Non-Monetary Transactions - Via Toll Free Number" and "Non-Monetary Transactions - at ATM." With some prepaid debit cards, it is not always clear exactly how much you will be charged or what activities you will be charged for. (For more, see Prepaid "Credit" Cards: Convenience At A Cost.)
Don't Lose Your Card
With many prepaid debit cards, it would be easy for someone who found it to use up your remaining balance without getting caught, and you may be less likely to get your money back than you would be with a traditional credit or debit card that was reported as lost or stolen. Prepaid cards don't always have the same protections as traditional debit and credit cards - it's important to read the terms and conditions of the card you own or are considering applying for to understand what your liability could be in such a situation.
There may also be a fee to replace your prepaid debit card if it is lost or stolen. The AchieveCard MasterCard prepaid debit card charges a replacement fee of $9.95 for a lost or stolen card, and if you want expedited shipping for your replacement card, the fee jumps to $29.95.
If you find yourself the owner of a prepaid debit card that you don't really need (perhaps you received one as a gift), here are some ways to quickly use up the balance and ditch the card. (For more, see Debit Cards: Why They're Not As Safe As You Think.)
Use the Entire Card Balance
If your goal is to get rid of the card, you should purchase something that you won't be returning, like groceries. If you use the card to buy something that you later decide to return, enough time may have passed that the card will charge you a monthly fee.
Know how much money is on the card before you start shopping and make sure your total, including tax, will be less than the balance before you check out. If you try to buy $51 worth of stuff with a $50 card, your purchase will be declined because there is no overdraft with these cards. Alternately, you can spend above the card balance and ask the cashier to put $50 on the card, then use another method of payment to cover the rest of your purchase.
Purchase a Regular Gift Card
With this strategy, you essentially exchange a card with unfamiliar terms and fees for a card that's easier to manage. Many grocery stores sell a plethora of gift cards, so you can easily convert your prepaid card into money for a store that you frequent.
You could also wipe out the balance by using the card to send yourself an Amazon email gift card. Amazon's email gift cards can be sent in custom amounts, so if you have a prepaid debit card with, say, $2.25 remaining, this is a good way to use it up. (To learn more, check out 6 Tips For Getting The Most Out Of Gift Cards.)
Withdraw the Entire Balance as Cash
There may be an ATM fee and/or transaction fee associated with turning your card into cash, but it could be lower than the fees you'll incur by hanging on to the card.
Close the Card and Request a Refund Check
It may be possible to close the prepaid debit card account, even if you've never used it to buy anything, and get a check for the balance. However, there may be a fee to do this, so read the fine print before choosing this option. It also adds an extra step to getting rid of your card, as you'll then have to deposit or cash the check somewhere.
The Bottom Line
Prepaid debit cards do make sense in some situations, but many people will find them to be inconvenient and full of hidden fees. The best way to avoid these fees is to educate yourself about them, ditch the card as quickly as possible or avoid prepaid debit cards altogether. (For more tips, check out Everyday Fees And How To Avoid Them.)