The Surprising Perks of Prepaid Cards

Young woman showing off her prepaid debit card

Despite their explosive popularity of late, prepaid debit cards — and the benefits that come with them — are still unfamiliar to a wide swath of the American public.

The natural offshoot of “closed-loop" store cards (like your iTunes, Amazon or Starbucks gift cards), prepaid cards are "open-loop" reloadable payment cards that are backed by familiar transaction networks (e. g., Visa, MasterCard, Discover or Amex) so they can be used at any store that accepts the network logo on the card. Such open-loop cards didn’t establish a foothold in the U.S. until the 90s. They’ve since matured into a financial fixture for millions of Americans, even among those with access to regular checking accounts and credit cards. Here’s why:

They’re great for budgeting

Prepaid cards are beloved by many followers of the envelope budgeting system, a money management technique popularized by your grandparents and personal finance gurus.

Whereas consumers once placed cash in envelopes or glass jars, they can now use prepaid cards to set aside money to pay for household expenses such as groceries, gas, entertainment, and even allowances.

“Parents can set the limit and monitor the spending of their teen or college student to help teach them financial responsibility, without the risk of running up credit card debt or overdraft charges,” says David Eason, chairman of the Canadian Prepaid Providers Organization.

Since you can only use the exact amount that you've deposited, there's no chance that you'll spend more money than you have available. That limitation is a major blessing for people who are consistently tempted by the easy credit of plastic. Simply load up the prepaid card with the cash that you'll need to get through the week or month — and no more. Over time, this kind of budgeting builds good financial habits.

Many prepaid card programs also impose limits on daily withdrawals, maximum load, and outbound wire transfers — all of which have the effect of controlling spending sprees and also limiting your losses if your card is lost.

No more overdraft fees

A majority of prepaid cards are free of overdraft fees, meaning you won’t have to worry about paying a fee for trying to make a purchase that would exceed the balance on your card.

There are many situations where this might come in handy, especially if you're one to indulge in impulse purchases before checkout. Above all, it forces you stay within your means, which goes hand and hand with sticking to a budget.

No credit, no problem

Virtually anyone can get a prepaid debit card. There are no credit checks or employment verification. Since you're not asking for any kind of credit, there's no need to pull your credit history — whether it's good, bad or ugly. You don't even need a bank account. Simply apply for a card online in minutes, and approval is usually a breeze.

The ease of obtaining prepaid cards is a major reason why their use is soaring among "un-banked" households (who lack access to any kind of banking service) and "under-banked" households (who might have a checking or savings account, but frequently use alternatives such as check-cashing services and payday loans). Nearly 10 million U.S. households don't have bank accounts.

Many consumers also aren't aware that many prepaid cards come with security features similar to checking and credit accounts, such as FDIC-insured deposits and zero-liability guarantees for fraudulent charges.

Uncle Sam prefers them

Many public agencies that distribute payments directly to consumers encourage the use of prepaid cards that can be automatically funded and reloaded. For example, citizens can choose to receive funds via prepaid cards from Social Security, Supplemental Security Income or Veteran Affairs.

In fact, the Social Security Administration phased out paper checks in 2011, and began requiring that payments be made electronically or via the Direct Express card program. Using direct deposits or prepaid cards "is safer and more reliable," said Michael Astrue, then-commissioner of Social Security, in announcing the change.

Another big benefit arrives at tax time every year. Prepaid cards are one of the quickest ways to receive IRS refunds, giving consumers greater control over their money. By opting for a direct deposit into their prepaid cards, most taxpayers can expect to receive their refunds within 21 days, as opposed to 4-6 weeks for a check in the mail.