If your bank or credit union has been offering you free prepaid debit cards, you should look at their program. These are not necessarily “gift” cards. There are a few subtle differences between prepaid debit programs. Just recently I began using a prepaid debit card my credit union has been promoting. For months I thought these were the usual gift cards. They’re a nice idea but I have a checking account and a debit card. I thought, why would I need a prepaid debit card too?
As someone at the credit union finally explained to me, their prepaid debit card program gives you a way to A) share your checking account with family members and B) protect that account from overdrafts and fees. While I was reeling from the thought of allowing my kids of having access to my checking account, the second selling point got my attention.
With this kind of prepaid debit card you tie it directly to your checking account. In a way it’s like Target’s Red Card. But there is no automatic discount on purchases. In fact, there no automatic anything. You must manually transfer money from your checking account to the prepaid debit card account. It’s like having a free second checking account. You can make ATM withdrawals, online and offline purchases, and generally use the card wherever you can use a Visa card.
Best of all, my credit union isn’t charging me any fees. I can load the card as often as I need to free. There is no monthly service charge. And I don’t need to maintain a minimum balance.
Use Either the Debit Card or Your Checking Account to Pay Bills
This is where the smart money comes in to play. Up until recently I’ve used my checking account for both immediate purchases and to pay regular monthly bills. We sit down and calculate our budget every month but every now and then I miscalculate and overspend the account. That really annoys me.
Fortunately we have an automatic overdraft option on our savings account. But once in a blue moon the overdrafts stack up. You’re only allowed 6 monthly withdrawals from a normal personal savings account. One month I nearly panicked when 3 automatic withdrawals occurred in 1 week. What if I need to dip into savings and I can’t, I thought? That was when I began talking with the credit union in earnest about opening another account. And that is when they suggested I try the FREE prepaid debit card program.
If you’re not running up incidental charges against your checking account it’s easy to keep things under control. Some bill payments require 2-3 days to clear. Some bill payments require only 1 day to clear. I’ve even paid a couple of bills where they took money out of my account right away.
If all the incidental charges for groceries, gas, and other daily or weekly purchases are handled through the prepaid debit card you know exactly how much money to keep in your checking account. You don’t have to worry about which bill payments have cleared.
Can You Pay for Gas with a Prepaid Debit Card?
This is one of those funny situations. Although you can use a prepaid debit card in most places the same as you would your normal checking account card, gas stations and restaurants place “hold” transactions against debit cards. They reserve an amount greater than your purchase until the purchase is cleared in 1-3 business days. They do this because you may use your card to pay more than you originally say.
Some gas stations decline prepaid cards at the pump, but you can see the attendant and have them swipe the card for you. With my credit union’s prepaid debit card they say you can probably use it at the pump but be prepared to lose access to some money for up to 3 days. I still use my credit card to pay for gas. I know I shouldn’t but that eliminates any chance of a pre-emptive hold transaction tying up money in my checking account.
Can You Use a Prepaid Debit Card for Recurring Payments?
It is my personal belief that recurring “direct debit” payments are a stupid idea for consumers. They are great for merchants because they can count on that money being deposited in their accounts. These recurring payments come right out of your checking account and if you don’t have the money to cover them on the day they hit, too bad. The bank charges you overdraft or NSF fees.
I swore off recurring payments after being hit by too many at one time. Even though I deposited money the same day, my (now former) bank applied an NSF charge for every one of those payments.
Authorizing recurring direct debits on your checking account is one of the dumbest ideas for consumers. Don’t do it.
But if you really want to sign up for Netflix or Hulu that way, then I recommend only using the prepaid debit card for the recurring payments. I think that’s a waste of a good resource. Maybe you can set up a traditional gift debit card to handle those payments. But I don’t like reloadable gift cards because they charge you monthly fees. Maybe there are some that don’t charge fees. You should look around.
Why Not Carry Cash Instead?
The number 1 reason to carry any type of card (credit, checking debit, or prepaid debit) is to avoid carrying cash. If you lose a $20 bill or someone steals it from you, that money is gone. If you lose your card and report it lost or stolen, your financial institution will block its further use and cover some or all charges you suspect are fraudulent.
So while it’s easier to manage your money on a cash-and-carry basis (because once it’s gone you stop spending), it’s safer to use plastic. I’m sorry but that is the way things work in our world. You have no guarantees with cash. You do have guarantees with plastic.
One reason why your bank or credit union may be willing to provide you with free prepaid debit cards is they can earn interest on the “float”. Float is the amount of money in their care in-between customer deposits and withdrawals. Insurance companies make money from float, too. So while you’re not earning any interest on the money you load onto a prepaid card, at least it’s safe and not costing you any money. That’s a better deal than carrying cash in your pocket.
Can Low Income Earners Use Prepaid Debit Cards?
Yes, they can. If you have a friend or relative who doesn’t have a bank account you may be able to add them to your prepaid debit card account as an authorized card holder. Check with your financial institution.
By the same token, if you are a low income earner you only need to find an institution that offers you a prepaid debit card option. Anyone with some cash and a valid ID can walk into a bank and open an account. If you meet their eligibility requirements you can also open accounts at credit unions or savings and loan institutions. Shop around.
For more information on how to manage your money for low income, visit the Low Income Aid Website. It’s free to use and doesn’t ask you for any private information. I know the people behind this site and they have no ulterior motives.
Prepaid Debit Cards are Not Perfect But They Help
I’m a believer now. I’ve been skeptical about the usefulness and viability of prepaid debit cards. Up until this year my wife and I have only used rebate and gift cards. While they’re nice to have you can’t count on them to have the money you need at all times. And not everyone accepts them. The prepaid gift card economy is improving but still has a ways to go.
Bank-provided prepaid debit cards fill in some of the slack. If they charge no monthly fees I can’t see much of a downside to using these cards. I hope they help improve your personal financial life as they have improved ours.