Don't Bother With Prepaid Debit Cards

Tickers in this article: EFX

BOSTON ( TheStreet) -- Prepaid debit cards might seem like a wise financial move on the surface, but when you zero in on what a prepaid card actually does (and doesn't do) for your finances, you begin to see why these types of cards serve little purpose in personal finance.

With a prepaid debit card, you simply load money onto the card and spend it - you're parking your money there and pay tons of fees along the way.

This brings us to the first problem with prepaid debit cards: the fees.

"It's hard to find a prepaid card without a menu of different fees, from a monthly fee, to an inactivity fee, to a fee for a paper statement, plus fees for talking to a customer service representative," says Gerri Detweiler, director of consumer education at Credit.com.

The monthly fees could be as high as $3 per month and an additional $2 just to load money onto the card.

And if you're looking to develop credit history, a prepaid debit card won't come in handy, since none of the activity on the card is reported to the three credit bureaus, Experian, Equifax (EFX) and TransUnion. The way to build credit is to stick with a traditional credit card.

Think about it: With a prepaid debit card, you're using your own money, which doesn't tell the credit bureaus anything about how you manage other people's money (the purpose of credit history). This is why credit cards are the only way to build up credit.

The protection for prepaid debit cards (and regular debit cards linked to a checking account, for that matter) is much less extensive when compared with a credit card, under circumstances of fraudulent use.

"With a credit card, the most you can be held liable for is $50 and the ability to dispute a charge. There is no ability to dispute charges with a debit or prepaid debit card," Detweiler says. This is especially important when using the prepaid card for online purchases.

Sometimes prepaid cards are sold in retail stores. In this case, it's imperative to register your card on the issuer's website so your funds can be restored if your card is lost or stolen.

Despite the pitfalls of prepaid debit cards, some consumers use these cards as checking accounts because the fees for checking accounts at banks can be as high as $12 to $15 per month if you don't meet a minimum balance requirement.

"Unbanked and underbanked people are a popular market for these cards, which is one reason one might end up with a prepaid card. And it may be cheaper than a checking account, especially if you've been paying overdraft fees lately," Detweiler says.