Avoid Getting Burned by Prepaid Debit Cards

Prepaid debit cards seem like a great idea. You can't overspend them, most don't have the ability to be overdrawn, and they provide an alternative for individuals who don't have bank accounts. Government benefits such as Social Security or state unemployment insurance may also be paid by a prepaid debit card.  And, they are sometimes given as gifts by people who want to essentially give cash—though there is a difference between prepaid cards and gift cards.

There are many differences between these cards and traditional debit and credit cards, including fees that can cost you a lot of money if you don’t know what to watch out for. Although new protections from the Consumer Financial Protection Bureau (CFPB) that make account fees more transparent went into effect in April 2019, it's still important to know the terms of your card so that you can avoid losing out.

Read the Fine Print

Card companies don't have to be bold about how they announce their fees. And they rarely ever do. In fact, many companies strategically lay out some of their most common fees and other important information in the fine print of the cardholder agreement. That's the section found at the bottom of this agreement in small font that's often hard to read. This section has a lot of information that is often overloaded with a lot of legal jargon. It sounds shady, but it's not illegal.

Because there's so much to go through, most people skip the fine print and even those who don't often just skim through this mountain of information. You shouldn't take this information lightly, though, as it can spell the difference between deciding on a company that can help preserve some of your hard-earned money and one that just chisels away at your account balance.

Fees vary based on the card company. Some impose a handful of charges, while others seem to have no end to the fees they charge their customers. Here are some of the most common charges you may come to expect:

• Monthly fees
• Fees to withdraw cash at an automated teller machine (ATM)
• A fee for not using the card
• Activation fees

Let's take a look at the Visa RushCard as an example. Consumers who use this card can expect to pay a:

• One-time card fee of $3.95 or $9.95
• Monthly fee of $7.95 or $5.95 if you set up a direct deposit on the unlimited monthly plan versus its pay-as-you-go plan
• Fee of $1.00 for each purchase if you have a pay-as-you-go plan

Those are only three of the possible fees users could incur.

Monitor Your Card Activity

Prepaid debit cards don’t automatically issue statements like credit and debit cards, so you need to either request them or find another way to keep track of your spending. Under the new CFPB rules, prepaid cards need to allow you to monitor your account for free. Some card companies allow you to track your spending the same way traditional banks do. This may be through an online portal or on a mobile app that you can access through your tablet or smartphone. For those who prefer on-the-spot communication, there are card companies that provide updates on charges and balances by text message.

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. Under the new CFBP rules, your money should be protected if your card is lost or stolen. However, it's important that you report your card as lost or stolen as soon as you find out so that you can invoke these protections.

Getting Rid of Prepaid Debit Cards

If you find yourself the owner of a prepaid debit card that you don't really need, here are some ways to quickly ditch the card:

Use it Up

If your goal is to get rid of the card, you should purchase something you know 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. As an alternative, if you want to spend above the card balance, you can ask the cashier to put $50 on the card, then use another payment method 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 wide variety 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 eGift card. Amazon’s eGift cards can be purchased 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. 

Withdraw the Entire Balance as Cash

If you have the option, why not take the balance in cash? Keep in mind, though, that you may incur an ATM fee and/or a transaction fee associated with turning your card into cash. But it may be worth it in the long run for you to get rid of 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 as well, 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 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.