If you think that prepaid debit cards are only for those with damaged credit, that isn't the case anymore. According to Fox Business, in 2009 $28.6 billion was loaded on to these prepaid cards, but that number is expected to top $200 billion in 2013. What's behind this more than 600% increase in prepaid card usage in just three years? About 13% of all American households use a prepaid card in their normal activities and many of those include Generation Y consumers. Instead of having checks deposited in to a bank, households can have the money placed directly on their prepaid cards and use their mobile devices or social media profiles to track usage. Technologically savvy customers find that the features of their debit cards match or surpass the features they get from their banks. Because the best cards have an easy-to-understand fee structure that may be lower than a traditional bank, consumers have flocked to these cards.

Not All Good
Not all cards get high marks, which makes shopping to find the best card essential. Because these cards aren't covered by the CARD Act, the protection that comes with traditional credit cards isn't present for prepaid debit cards. Consumer Action posted these warnings about prepaid debit cards.
Fees
Some cards, especially those designed for consumers with subprime credit, may pack on the fees including paying to talk to a customer service representative, a fee if you don't use your card, a fee to load money on to the card, a fee if a transaction is declined and a fee for using ATMs.

FDIC
Unlike a bank that holds FDIC insurance that protects your deposits up to $250,000, a prepaid card doesn't have that same protection. Although unlikely, if the company goes out of business your money may be at risk.

SEE: Who Backs Up the FDIC?

Disclosure
Prepaid cards have very few regulations that govern customer disputes. The fine print may say that you agree not to file.

Lost Card
If you lose your card, you're at the mercy of the card company which may or may not go to bat for you.

How to Pick the Best Card
First, keep the fees to a minimum. U.S. News & World Report put together a list of its favorite cards and minimal fees was its highest criteria. U.S. News & World Report advises to analyze your spending habits and find a card that charges the least amount in the areas where you are likely to amass fees. If you use ATMs frequently, look for a card like the Green Dot Card that charges no ATM fees. If you plan to use your card frequently, look for a card that waives certain fees if you have more than a certain amount of transactions each month.

SEE: Cut Your Bank Fees

Next, look for a fee structure that is easy to understand. Some cards charge fees for most card activity while others may use more of a flat fee model. These flat fee cards may be lower in fees once you analyze your monthly activity. Finally, there are numerous websites that allow you to do a side-by-side comparison of each card. One study by the Pew Research Group found that most consumers don't take the time to compare the different features of the cards before making a decision. Comparing the offers will likely save you money in the end.

The Bottom Line
According U.S. News & World Report, the American Express Prepaid cards and the Suze Orman card were some of the best cards it found for its 2012 report. An increasing number of consumers are using prepaid cards instead of banks. For families with more complex financial needs, a traditional bank or credit union is still essential.

SEE: Tired of Banks? Try a Credit Union

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. Credit & Loans

    Refinance Vs. Debt Restructuring: What's Best For Your Credit Score?

    Discover key differences between refinancing and restructuring debt in regard to terms, the negotiation process and effect on credit scores.
  3. Investing Basics

    Explaining Rehypothecation

    Rehypothecation occurs when an asset used as collateral for one party is reused in another transaction.
  4. 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.
  5. 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.
  6. Technical Indicators

    Key Financial Ratios to Analyze Retail Banks

    Learn about key financial metrics that investors use to evaluate retail banks, and how the industry is fundamentally different from most other industries.
  7. 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 ...
  8. Credit & Loans

    5 Ways to Maximize Your Credit Card Points

    How to get the most bang for your rewards buck.
  9. 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.
  10. 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.
RELATED TERMS
  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 ...
RELATED FAQS
  1. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. What net interest margin is typical for a bank?

    In the United States, the average net interest margin for banks was 3.03% in the first quarter of 2015. However, this was ... Read Full Answer >>
  5. What are the main benchmarks that track the banking sector?

    The appropriate benchmarks for tracking banking sector performance depend on the type of banking. For instance, commercial-only ... Read Full Answer >>
  6. What are the major categories of financial institutions and what are their primary ...

    In today's financial services marketplace, a financial institution exists to provide a wide variety of deposit, lending and ... 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!