Prepaid Debit Card: Your First Credit Card? 

Should your first credit card be a prepaid debit card? This blog will look at the pros and cons of credit cards with a focus on prepaid debit cards. You won’t find this discussion anywhere else!

Like any plastic money card, a prepaid dedit card is a convenient form of exchange without being actual cash. 

The Prepaid Debit Card

Consider the virtues of a prepaid debit card. While not a credit card, parents often choose a prepaid debit card to start their kids on the plastic-card experience. With prepaid debit cards, kids learn how bank cards act, how to use ATMs, and how stores process bank cards – a card that will not harm the kids. These accounts usually do not include paper checks or a credit instrument.

That’s the real value, in my opinion. A prepaid debit card has no credit instrument attached to it. This is not a bank debit card with overdraft protection. It’s strictly cash-and-carry. The only money available is the money you deposited in it. The bank won’t pay the retailers if the money is not there. 

Why are Prepaid Debit Cards Declined at Gas Pumps?

And prepaid debit cards occasionally get declined. Gas stations put holds on 100 percent or even 150 percent of the actual purchase, which could result in card decline at the pump for insufficient funds. If you make a $30 gas purchase, you may get a $75 charge on the card. If the money’s there, fine, but you won’t even know the $75 is gone unless you check your balance on your smartphone. It won’t be restored for hours, even days. If the $75 is not there, you’re $30 purchase will be declined, even though you had a $40 balance on your card. 

Overdraft Relief

Unlike a credit card, a prepaid debit card’s issuer doesn’t charge a $35 overdraft fee for overdraft protection. So maybe the consumer can be humiliated at the cash register when the card is declined. Still, they won’t suffer the severe financial hit when the overdraft fees pile up. 

While it’s true that credit cards build credit scores, personal loans, student loans, auto loans, and mortgages/equity loans build credit too. You can even raise your credit score by paying your utility bills. Moreover, the perception that credit cards are a lousy form of credit (they charge astronomical interest rates; they’re not secured) might be undesirable. For some weird reason, everybody wants a credit card in their wallet when they may be much better without any cards in their wallet.

Cards that Build Credit

But there’s no doubt that credit cards build credit — if you use them wisely. And credit cards are easy to attain. Since using a prepaid card does nothing for your credit rating, you must use one of the other credit forms to raise your credit rating and use the prepaid debit card as a cash card.

Prepaid cards have other virtues:

• Your paycheck can be automatically deposited in them.
• They offer budget tools.
• You’ll enjoy the convenience of online transactions and bill pay. 

Why Avoid Credit Cards?

The reasons to avoid credit cards as a first plastic card and opt for a prepaid card or alternative:

1. Credit card debt or the high-interest rates lenders demand. 

2. Missing payments. Suppose you can’t even pay the minimum payment after 60 days. In that case, lenders can raise your interest rates through the roof, and that’s on all existing balances because your delinquent behavior allowed the super high rate to kick in. 

3. Sometimes, the debt you carry can cause a lender to raise your interest rates, even if the act is unfair. The larger your debt, the more risk you look to lenders and the higher the interest rate they charge going forward. Most credit cards do not have a fixed rate but a variable rate tied to the ups and downs of something like the prime rate. If it goes up, so does your interest rate on the credit card. 

4. Lenders can raise your interest rate whenever they want to if you’ve had your card for longer than a year. As appalling as it sounds, banks increase the rate you pay on your credit card when the inflation rate increases. That underscores how little reason a lender needs to raise your interest rate.

When a Boring Choice Makes Sense

Prepaid debit cards aren’t that bad a choice. The reality of credit card agreements and who credit cards are tailored for, in actuality, place credit cards out of the reach of most ordinary people. Users need significant disposable income and transaction security (something both over-rated and overkill) to enjoy the perks of credit cards. Air travel, exotic cruises, online purchases, and expensive grocery bills attract them. The benefits of credit card perks apply to them. Is that the average consumer’s profile? Even for the well-off to come out ahead, they must pay their credit card balances off every month to benefit. Unfortunately, miss one month, and debt starts snow-balling. Miss two payments, and even highly paid professionals will likely end up in credit card hell. 

So, what’s the advantage of a prepaid debit card? You don’t ever carry a credit balance on it; it’s a debit card. In the final analysis, prepaid debit cards are a bit Iffy– if skip ATM machines (and the fees) and instead use the cash-back option at stores, prepaid cards will work. If you only deposit cash in the account when necessary, and if you use electronic transfers to deposit money, you’d be a good customer. You’ll enjoy a fully functioning card with no fees. You’ll never carry debt from month to month. So, if you can accept all that, the first-time user of plastic cards will be better off with a prepaid debit card. 

Some debit cards win points with critics: Movo, American Express Bluebird, Walmart Money Card , Fam Zoo, Chime, and Paypal prepaid . 

Warning: Check out the fees at these cards and explore how to get around fees before signing up. 

 Also, check out similar banking card at VARO. 

This article was originally published in 2021 and was slightly edited.

Cover Photo: Warren Wong/Unsplash

If you enjoyed this blog, please subscribe below to my newsletter!