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.

IN PICTURES: 6 Major Credit Card Mistakes

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.

IN PICTURES: 7 Tips For Closing A Credit Card

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.)

Related Articles
  1. Credit & Loans

    Don't Get Burned by High Credit Card Rates

    The average card charges 11.8%, and some rates top 20%. Experts warn that credit card interest may remain steep.
  2. Savings

    How Volatile Exchange Rates Affect Your Vacation

    Those ever-changing fluctuations can make a difference in anything from your hotel room to an ATM transaction.
  3. Credit & Loans

    Can Corporate Credit Cards Affect Your Credit?

    Corporate cards have a hidden downside. If the company fails to pay its bills, you could be liable for the amount and end up with a damaged credit rating.
  4. Investing News

    What Is The New Credit Card Chip Good For?

    Under current U.S. credit card requirements, credit card issuers are required to issue chip cards as of October 1, 2015. Instead of swiping your card as you do now, you will slide the card into ...
  5. Credit & Loans

    5 Ways to Maximize Your Credit Card Points

    How to get the most bang for your rewards buck.
  6. Investing

    How to Effectively Compare Credit Card Rewards

    There are so many different reward credit cards that are available. Understanding how each type work will help you pick the best card for your needs.
  7. Credit & Loans

    Joint Credit Cards: The Pros and Cons

    A joint credit card may sound like an easy way to split the bills, but make sure you know what you’re getting into first.
  8. Credit & Loans

    Travel Tips: Avoid Exchange Rate Headaches

    How to avoid the most common issues and hassles raised by exchange rates while traveling abroad.
  9. Investing

    Why U.S. Credit Cards Are Getting a Chip and Pin

    With the introduction of EMV technology into U.S. credit cards, consumers should worry less about fraud and counterfeiting.
  10. Credit & Loans

    What Qualifies as a Nonperforming Asset?

    A nonperforming asset is a loan made by a financial institution to a borrower who has failed to make any scheduled payments for at least 90 days.
  1. Transferable Points Programs

    With transferable points programs, customers earn points by using ...
  2. Luhn Algorithm

    An algorithm used to validate a credit card number.
  3. Roll Rate

    The percentage of credit card users who become increasingly delinquent ...
  4. Truncation

    The requirement mandated by the FTC for merchants to shorten ...
  5. Purchase Money Security Interest ...

    A security interest or claim on property that enables a lender ...
  6. Linked Transfer Account

    Accounts held by an individual at a financial institution that ...
  1. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
  2. What is the best way to start to rebuild your credit after a bankruptcy?

    Bankruptcies can be devastating to your credit score. Even worse, a bankruptcy will be listed on your credit report for between ... Read Full Answer >>
  3. What were the primary financial crimes involved in the ZZZZ Best case?

    ZZZZ Best was a company started by Barry Jay Minkow that claimed to be a carpet cleaning business. In fact, it was a Ponzi ... Read Full Answer >>
  4. Can a creditor sue me for a delinquent account?

    If a credit card account becomes delinquent, the creditor can sue the debtor for the balance as soon as the delinquency occurs. ... Read Full Answer >>
  5. How do I transfer my credit card history from one country to another?

    It is currently not possible to transfer your credit history to another country if you relocate. The credit metrics used ... Read Full Answer >>
  6. What are some examples of simple interest loans?

    Two good examples of simple interest loans are simple interest car loans and the interest owed on lines of credit such as ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!