The prepaid debit card industry continues to do a masterful job convincing people that their product is a better option than a credit card or a well managed checking or savings account with a bank or credit union. And I’ve also noticed that many people are now incorrectly referring to prepaid debit cards as simply “debit cards”, which is incorrect. The two are not at all the same things. The differences are many…
A debit card is a plastic connection between you and your checking account. Think of it as a plastic check, to make it simple. You swipe the card and the money is taken directly from your checking account. Like prepaid debit cards, a debit card is NOT an extension of credit and does NOT show up on your credit reports.
With debit cards there are no interest rates, no credit limits and no due dates…it’s not credit. For the younger crowd who will never write a paper check in their lifetime, this is the alternative.
Related: Check out the best prepaid credit cards for 2016 here.
Prepaid Debit Cards
One of the most aggressively marketed financial services products in today’s environment…often with misleading information about cost and credit building attributes. A prepaid debit card is NOT the same as a debit card. In fact, it’s closer to a gift card that you can buy at the mall than it is to a debit card.
Prepaid debit is a stored value product, which means you load funds or “value” right on the card. It’s not tied to a checking account or any other bank account. If you lose the card, too bad. Prepaid cards also have no credit building value, regardless of what their marketing may suggested. If you don’t believe me…maybe you’ll believe the credit bureaus…this is what they say in their credit reporting resource guide…in the FAQs section…
Question: “How should prepaid credit cards/gift cards be reported?”
Answer: “Do not report prepaid credit cards/gift cards because the consumer has no credit obligation.”
It’s funny to me that even the credit reporting agencies liken prepaid debit cards to gift cards as they bundle the two in the same credit reporting related question.
Perhaps the most offensive difference between the two cards is the fee structure. Debit cards have no fees, unless you use it irresponsibly and take your balance to below the $0 mark…and then, frankly, you deserve a punitive fee. Debit cards also don’t normally have monthly or annual fees.
Prepaid debit cards, on the other hand, have more fees than a dog has fleas. Reading the fee schedule for some of these prepaid debit cards is like reading a box score of a baseball game in a newspaper.
The choice is yours as to which you should use…if it were up to me I’d use neither. Credit cards are better than both, cheaper than both, offer more capacity than both, offer better fraud protections than both and help build or rebuild credit.