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The Dangers of Prepaid Debit Cards – Part 2

The Dangers of Prepaid Debit Cards – Part 2

On our last entry, we started discussing how because a celebrity endorses a financial product like a prepaid debit card does not make it good product at all. In fact, we took a look at a few examples (namely the new Justin Bieber card and the Kardashian prepaid debit card scandal of a couple of years ago) of prepaid debit cards that while popular, in fact offered very disadvantageous terms for customers.

Let’s keep taking a look at other dangers of prepaid debit cards and how to protect yourself from them.

Another aspect of prepaid debit cards that most financial experts warn about, is that these cards usually fall short of what they promise. For example, one of the main selling points of prepaid debit cards is that they can help consumers avoid debt by capping the amount they spend. The issue with this is that this measure infantilizes consumers by not allowing them to be responsible for their won expenses. So the moment they acquire another financial obligation like, let’s say, a personal loan, they don’t know how to manage it properly.

Furthermore, one of the most common falsehoods surrounding prepaid debit cards and that many customers tend to believe, is that they can them rebuild their credit score if it is not in good shape. How to know this is false? Well, it turns out several credit agencies have gone on record stating that they actually don’t include prepaid debit cards in their reports. So, in short, prepaid debit cards are not not credit products, so they will not qualify for any of the benefits that credit or personal loan holders can benefit from. In fact, if you think carefully about it, prepaid debit cards have no due dates, no late payments and no collections, so they actually have nothing that can make them credit instruments. It’s almost like buying something using an iTunes gift card.

Another important drawback of prepaid debit cards that many banks and lending companies (obviously) fail to mention, is that these (contrary to personal loans) are not insured by the Federal Deposit Insurance Corporation. What this means is that if the bank or lender that issued your prepaid debit card goes bankrupt or something else happens to them, you risk losing all the funds on your prepaid debit card.

Not everything is bad news though: In fact, prepaid debit cards can also help a small segment of people in the market if they are used for emergencies and during short periods of time. So if you happen to have bad credit or simply have never used any bank services, then acquiring a prepaid debit card can help you whenever you need to make a payment on establishments that only accept cards. However, the vast majority of customers will of course want to either start holding bank account in a more “formal” way or will want to rebuild their credit score, since this is so important for acquiring other financial help like personal loans or mortgages in the future.

For these type of customers, secured credit cards (also called “prepaid” credit cards) are a great alternative over prepaid debit cards. Secured credit cards require a “security” deposit very similar to the one asked by banks when applying for an apartment lease for example. Then, once granted the card, the cardholder has to pay a monthly bill just like any other credit card. With time, if your repayment behavior is optimal, you will get promoted to an unsecured (or “conventional”) card, and then you will also be able to apply for personal loans or unsecured credit cards elsewhere.

Lastly, conventional credit cards offer consumer protections that prepaid debit cards simply can’t. For example, if you happen to get billed for a product the you either didn’t ordered or never arrived to you, you can create a dispute and the charge will be removed from your bill until everything clears up in accordance with the Fair Credit Billing Act.

And there you go. As you can see, sometimes conventional credit cards are not that bad. They certainly have their drawbacks, but they certainly have more advantages than prepaid debit cards, which are, after all, just one more kind of business for banks. So choose wisely and always make an informed decision.