Owning a credit card is a convenient alternative to carrying cash. But these cards have their drawbacks too, especially if the desire to buy goods or services overshadows the ability to pay for them. Prepaid debit cards offer consumers both the convenience of electronic purchases, as well as protection against overspending.
In this article, we're going to talk about prepaid debit cards and how they differ from credit cards. As part of that discussion, we'll talk about the advantages and disadvantages of holding and using these cards. We'll also review the typical fees associated with debit cards, and what can happen if it's lost or stolen.
At one time, consumers had three options when making a purchase: cash, check, or a credit card. But carrying around cash was inconvenient, and writing a check took a lot of time at the register. Credit cards were convenient, but required discipline to stay out of debt.
Today, debit cards (also known as check cards or bankcards) are the fastest growing form of payment in the United States. In fact, survey data collected by the Federal Reserve in 2007 indicates:
Note: EBT cards are electronic benefits transfer cards, and are typically issued by a government agency for use in the purchase of food and other essential goods.
Whenever someone uses a credit card, he or she is borrowing money from the card issuing company to pay for something. Through this process, a credit card is really a loan of money. If the balance is not paid for in full, the card issuing company will charge the cardholder a fee to collect the interest due on the loan.
While a prepaid debit card offers the same convenience as a credit card, the money used in the account is owned by the cardholder. That's why they're sometimes referred to as "prepaid" debit cards. Money is removed (debited) from the account (prepaid) as it's used to pay for goods and services. There is no line of credit extended to the accountholder, and no loan of money is created by each transaction.
There is no doubt that debit cards are growing in popularity, and perhaps one of the most compelling reasons to use one is to avoid overspending. Some of the other advantages include:
Debit cards may be growing in popularity, but using one has its drawbacks too. Some of the disadvantages include:
Credit card issuing companies make money through the fees they charge cardholders, as well as merchants that honor their card. For example, the cardholder can be charged a financing fee (interest on unpaid balances), and an annual membership fee. These companies also collect a small fee each time the card is used. This is referred to as an interchange fee, and is paid by the merchant, while all other fees are paid by the cardholder.
Unfortunately, companies issuing debit cards charge many fees, for example:
Note: The example fees shown above are those actually charged by a card issuing company.
About the Author - Prepaid Debit Cards (Last Reviewed on June 30, 2016)