What Is a Prepaid Debit Card?

There are a few things you can assume about Ramsey people: They eat beans and rice. They hate debt with a passion. And they carry debit cards—not credit cards.

Yeah, it’s no secret we love debit cards around here. Paying for stuff with money you already have (aka not using credit)—there’s nothing like it. But what about prepaid debit cards? Despite what you might think, they’re not exactly the cousin to your bank account’s debit card. And there’s a lot more to prepaid debit cards than meets the eye. Let’s dig into all the ins and outs of prepaid debit cards.

What Are Prepaid Debit Cards?

A prepaid debit card is a type of payment that isn’t linked to a bank account or credit card. Instead, you load the card with money and can only spend the amount of money on the prepaid debit card (almost like a gift card). You can add and spend money like a normal debit card without ever opening a bank account. And since you can’t spend more than you add to the card, overdraft fees are a thing of the past here.

Some people think of prepaid debit cards as an easy way to keep a lid on their spending. That’s great if it works for them, but there’s an easier way to keep your spending in check—it’s called budgeting. And it’s the only way to make sure you’re not overspending like crazy. Our free budgeting tool, EveryDollar, is the best way to track your spending (no matter how you decide to spend it).

The Prepaid Debit Card Industry is Growing

You might be wondering, Who puts money on prepaid debit cards these days? And we don’t blame you. But the truth is, the prepaid debit card industry is big business. In 2019, the prepaid debit card industry was valued at $1.73 trillion and is supposed to grow to $6.87 trillion by 2030.¹ Dang!

Prepaid debit cards target people who don’t have bank accounts. These folks see the cards as an easy way to manage their money without getting into trouble—like overdrawing or spending too much cash. And at first, that might sound like a good idea. But when you really look at the prepaid debit card industry, you’ll see that most of these card companies take advantage of people who are struggling with their money. The prepaid debit card industry can be predatory, just like their awful cousin the payday loan.

In the last several years, though, these cards have been becoming more popular. A study by the Federal Reserve found that in 2018, the number of prepaid debit card payments jumped to 13.8 billion.² Looks like somebody out there is using these things!

How Much Money Can You Put on a Prepaid Card?

Each prepaid debit card has a limit that the companies come up with ahead of time. Some prepaid debit cards might have a limit of $15,000, and some might cap at $500. Who knows why someone would want to load up one of these babies with $15K, but it’s possible to do it if you really wanted to. (But why?)

What Fees Do Prepaid Debit Cards Have?

Prepaid debit cards will charge you fees for everything under the sun. The types of fees and the amounts of those fees change from card to card—some fees might be under $3 and some might land in the $5 to $10 range. At first, that might not sound all that bad. Especially if it’s just a single fee each month, right? Well, that’s not how most of their fees work.

Buckle up, because you might be charged those fees for things like:

• Buying the card
• Performing monthly maintenance
• Reloading money
• Withdrawing from an ATM
• Getting your card declined
• Making a purchase in-store or online
• Being inactive for too long
• Getting paper statements
• Making card-to-card transfers
• Using bill pay
• Replacing the card
• Needing a second card
• Making foreign transactions
• Speaking with a customer service rep
• Calling customer service
• Checking the account balance

Good. Grief.

Budget every dollar, every month. Get started with EveryDollar!

Do you see a trend here? They want to charge you for everything. Yuck. You won’t have any money left on the card by the time they finish socking it to you with those fees. That’s just plain messed up. Even at just $3 a pop, these charges add up fast. Talk about a fee frenzy! And even if you’re used to some bank fees with your current bank, chances are, they’ve got nothing on prepaid debit card fees.

Benefits of Prepaid Debit Cards

Okay, as bad as these prepaid debit cards are starting to sound, they aren’t the worst things in the world (they’re not credit cards, after all). Here are a few of the reasons someone might be drawn to using prepaid debit cards.

There are no overdraft fees.

Yep, it’s true. You can dodge a possible $35 overdraft fee by getting a prepaid debit card (you can only spend the money that’s already on the card). But remember all those fees we talked about earlier? Yeah. These guys might not have an overdraft fee, but they’re going to nickel and dime you to death with fees for everything else you can do with the card.

They aren’t linked to credit.

Probably the biggest pro for prepaid debit cards is that they use money you already have—unlike credit cards. You can’t spend more than you have on the card, and you can’t go into debt using prepaid debit cards. On top of that, using a prepaid debit card won’t build your credit score either. Some other financial gurus might tell you that’s a downside, but we sure as heck won’t. Not caring about building credit—that’s a win in our book for sure.

Your spending is limited.

Look, you shouldn’t be using a prepaid debit card as a budgeting tool—plain and simple. But it’s definitely nice that you can’t overspend with these things. Once the moolah runs out on the card, it’s gone.

Are Prepaid Debit Cards Worth It?

Keep your cash. These days, there are all kinds of new prepaid cards popping up: one to hold your tax refund, one for IRA distributions, one for getting your paycheck, and even one for your kids’ allowances. Sure, it might be convenient to have money hanging out on a prepaid debit card, but the truth is, the whole thing is still a big-time marketing gimmick.

Back here in reality, you don’t need a special card for special income. Call us old-fashioned, but you can just use your bank account for that.