How to Find the Right Prepaid Debit Card

Prepaid debit cards are not only for those with damaged credit. According to the Federal Reserve, the cards are widely popular, with the number and value of payments growing by 11.3% between 2012 and 2015; in 2016, there were 4.4 billion transactions valued at $151.75 billion. 

What's behind the increase in prepaid card usage? About 13% of all American households use a prepaid card in their normal activities and many of those include Generation Y consumers. Instead of having checks deposited in a bank, households can have the money placed directly on their prepaid cards and use their mobile devices or social media profiles to track usage.

Technologically savvy customers find that the features of their debit cards match or surpass the features they get from their banks. Because the best cards have an easy-to-understand fee structure that may be lower than a traditional bank's, consumers have flocked to these cards. (See How do prepaid debit cards work?)

Not all prepaid debit cards get high marks, which makes shopping to find the best card essential. And because these cards aren't covered by the CARD Act, they don't have the same protections that traditional credit cards provide. (See Credit vs. Debit Cards: Which Is Better? and How to Keep Your Debit Card Transactions Safe.) Consumer Action posted these warnings about prepaid debit cards.

Some cards, especially those designed for consumers with subprime credit, may pack on the fees, including a fee when you talk to a customer service representative, one if you don't use your card, another to load money on to the card, yet another if a transaction is declined and still another for using an ATM.

If you shop around, you can find good deals. Bluebird by American Express charges no monthly fees and offers free withdrawals at certain ATMs; loading the card through direct deposit or at Walmart is also free. Other retailers may charge you $4.67, on average.

Unlike a bank, which holds Federal Deposit Insurance Corporation (FDIC) insurance that protects your deposits up to $250,000, a prepaid card doesn't have that same safety net. Although unlikely, if the company goes out of business your money may be at risk.

Prepaid cards have very few regulations that govern customer disputes. The fine print, for example, may say that you agree not to file.

If you lose your card, you're at the mercy of the card company, which may or may not go to bat for you.

First, look for a card that keeps fees to a minimum. That was U.S. News & World Report's top recommendation when it put together a list of its favorite cards. It suggests that you analyze your spending habits and find a card that charges the least in the areas where you are likely to amass fees. If you use ATMs frequently, look for a card like Bluebird by American Express, mentioned above. Or, if you plan to use your card frequently, look for a card that waives fees when you exceed the monthly transaction limit.

Next, look for a fee structure that is easy to understand. Some cards charge fees for most card activity while others may use more of a flat-fee model. These flat-fee cards may be less expensive once you analyze your monthly activity.

Finally, there are numerous websites that allow you to do a side-by-side comparison of each card. A study by the Pew Research Group found that most consumers don't take the time to compare the different features of the cards before making a decision. Comparing the offers will likely save you money in the end.

An increasing number of consumers are using prepaid cards instead of banks. If the pros outweigh the cons for you, the American Express prepaid card is one of the best currently on the market. Two others to look at include the Movo Virtual Prepaid Visa Card and the Chase Liquid Card. Note that families with more complex financial needs are likely to find that a traditional bank or credit union account is still essential.