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Thinking About a Prepaid Debit Card? Here’s What to Consider

Prepaid debit cards have gone mainstream, no longer a fringe financial product for people without access to a bank account.

The growth has been astronomical:

  • Between 2012 and 2014, use of prepaid cards grew by more than 50 percent in the U.S., according to a report by the Pew Charitable Trusts. Pew estimates that 23 million adults now regularly use these cards.
  • Prepaid cards grew from less than $1 billion in 2003 to nearly $65 billion in 2012, according to the Consumer Financial Protection Bureau.
  • A 2013 Federal Reserve Board study said these cards are the fastest growing form of non-cash payment.

General purpose reloadable prepaid cards, like Bluebird and Green Dot, are basically a debit card that’s not linked to a checking account. You can only spend what’s loaded on the card, making it a great budgeting tool.

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“A lot of people use these cards to keep from going into debt and avoid overdraft fees,” said Susan Weinstock, director of Pew’s Consumer Banking Project. “They’ve been burned by their checking overdraft fees and they want a product that they can put money on, spend it down and don’t have to worry that they’re going to spend more than they have.”

The dos and don’ts of debit cards

Many millennials find prepaid cards appealing for other reasons.

“Along with an aversion to credit, millennials have a real willingness to embrace non-traditional financial products and stay away from banks altogether,” said Matt Schulz, senior industry analyst for CreditCards.com.

Prepaid cards have gotten much better in the last few years. Many of the financial companies selling them have added features and improved their fee structures to make their cards an attractive alternative to a bank checking account. But some cards still have “high and unexpected fees,” according to a new market survey by Consumer Reports.

“Not all prepaid cards are created equal,” said senior editor Jeff Blyskal. “There are differences in pricing and fees, and in the transparency of the terms and conditions for when you use the card.”

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Thanks to a competitive market, more prepaid card issuers now charge a monthly fee, rather than a per transaction fee. Many now let you load money onto the card via direct deposit, which often results in that monthly fee being waived.

And the winners are…

Consumer Reports reviewed 20 prepaid cards on four factors:

  • Value: how much they cost to use
  • Convenience: how widely the card network is accepted, availability of in-network ATMs and bill pay
  • Safety: the money loaded on the card is protected by FDIC insurance
  • Transparency: how well fees are disclosed

The highest-rated cards had fewer fees (and make them easier to avoid), have FDIC insurance, do a better job of disclosing fees and offer features comparable to a traditional checking account.

The American Express-Walmart Bluebird card was top-rated because it does not have a monthly fee and offers services such as bill pay and free access to in-network ATMs.

Also highly rated were the Chase Liquid Visa and Green Dot Prepaid Visa. Both cards charge a monthly fee, but are more widely accepted than Bluebird.

NetSpend is the lowest-rated card, getting poor scores for value and convenience. One reason cited by Consumer Reports: It charges a $2.50 fee for a cash withdrawal at a financial institution or for using an ATM.

NetSpend disagrees with this rating. The company told NBC News in an email that it offers a choice of fee plans, enormous convenience and a clear disclosure of all fees and terms.

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“NetSpend does not believe the Consumer Reports scale accurately reflects the NetSpend product,” Lisa Henken-Ramirez, chief customer officer wrote in her email. "The NetSpend Prepaid Visa Card discloses all fees and terms and conditions on our web pages, similar to other cards who received high scores."

A few drawbacks

Prepaid cards, like traditional debit cards linked to a checking account, do not have the same federal fraud protections as credit cards. But the financial institutions issuing these cards now voluntarily provide zero liability protection, similar to what is offered on major credit cards.

While using a prepaid card can be helpful in many situations, it will not help you build or rebuild your credit score.

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“Because they’re essentially a plastic equivalent of cash and not an extension of credit, the card usage is not reported to any credit reporting agencies,” said credit expert John Ulzheimer.

Note: Traditional debit card transactions are also unreported to the credit bureaus and will not help your credit score.

More consumer protections coming soon

The Consumer Financial Protection Bureau has proposed rules that would require better disclosure of fees, provide protection against unauthorized or fraudulent use of the card and spell out procedures for handling errors. The bureau is expected to release its final rules within the next few months.

Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitter or visit The ConsumerMan website.