Time to Replace Your Debit Card With a Prepaid Card?

Prepaid cards, a good option for people who want more control over their spending, could be a cheaper alternative to debit cards.

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The idea of paying fees for access to their own money doesn’t sit well with most consumers--especially after Bank of America’s recent announcement of a $5 monthly fee for debit card users (the company is reportedly reconsidering the controversial fee.) While big banks contend that they’re just trying to generate extra revenue after Congress passed the Durbin Amendment that cuts swipe fees for debit card transactions, consumers aren’t happy about absorbing the costs.

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Prepaid cards, historically a good option for people who want more control over their spending, could be a cheaper alternative to debit cards. These cards come in many forms--reloadable cards, gift cards, and travel cards--and you don’t even need a bank account to get one. Is it time to make the switch? Here are some things to consider:

Key Features of Prepaid Credit Cards

One of the primary reasons why people choose the prepaid card is so that they don’t have to get a credit check or even link the card to a bank account. These cards are sold like a gift card and typically cost about $5 to activate. You can load the card with a balance of your choice and even use a check, direct deposit, or a funds transfer to add money to it. Most are branded by Visa or MasterCard, and are accepted virtually everywhere. Gift cards, however, are not usually reloadable and are issued with a fixed balance. Your best bet is to get a reloadable card so that you don’t have to pay multiple activation fees.

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Still, there are some downsides to using prepaid cards. Each one has its own set of fees and restrictions and may have an expiration date. Some prepaid cards allow ATM cash withdrawals and online purchases, but you will probably incur fees per transaction and these are taken right off the balance. You won’t be able to build up any credit history with these cards, and might incur inactivity fees if you just stop using it for a while.

When You Would Benefit from a Prepaid Card Versus a Debit Card

There are only a few scenarios when you would benefit from using a prepaid card instead of a debit card. These include:

• Averting ATM fees. This is possibly one of the biggest reasons to switch to a prepaid card, in light of increasing ATM fees. Most prepaid cards allow you to make or two fee-free ATM withdrawals per month and then charge a fee for each additional withdrawal.

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• For travel. Travel prepaid cards can be a safer alternative to regular travel credit cards, cash, and travelers checks because they’re loaded with a preset amount and aren’t linked to any accounts. If your card gets lost or stolen, you’ll only potentially lose the money you loaded on the card. If you are able to report the loss or theft right away, the card can also offer “zero liability” protection so you don’t lose any money at all. If this was a debit card, the thief might have access to all of the funds sitting in your bank account.

• Managing your spending. If you have a tendency to overspend and are trying to curb a credit card addiction, using a prepaid card can help you get a grip on your spending habits. Since you’re only limited to spending the amount you have on the card, you simply can’t overspend on that next shopping trip.

• Saving on fees. Using a prepaid card means you don’t have to worry about overdraft fees you might incur with a debit card. Your money is right there on the card and your account will never be linked to any of your bank accounts. In fact, your bank won’t even know you have one.

• Paying for online purchases more securely. If you have a Visa or MasterCard prepaid card, you can reduce your risk of identity theft when making an online purchase. If you’re usually wary about giving out personal information on the Web, using a prepaid card could be your best alternative to a credit card or debit card. Most issuers protect against fraudulent transactions and deposits are FDIC-insured up to $250,000. Check your cardholder agreement to see what exceptions might apply.

• Managing direct deposits. You can have your direct deposit go straight to your prepaid card and save on load fees and monthly fees. The direct-deposit load also means you won’t have to make that extra trip to the issuer when it’s time to add funds.

Sabah Karimi is an award-winning Yahoo Contributor and WiseBread.com’s guide to comparing credit and debit cards.