Prepaid debit cards hold their own in today’s banking world. Among Americans, 25% either use a reloadable prepaid card or have used one in the past few years, according to an April 2015 TD Bank survey.
Among millennials, that figure jumps to 33%, the survey notes.
Prepaid debit cards offer key advantages, including the chance to control spending and steer clear of overdraft fees. At the same time, after using a prepaid card, you may find at some point that it’s worthwhile, and affordable, to explore other banking options.
“Prepaid cards are a starting point, not an end solution for money management,” says Brad Hanson, president of MetaBank and Meta Financial Group in Sioux Falls, South Dakota.
But when is it time to move on? Here are 6 signs you might be ready to pursue other financial tools.
Prepaid cards can help keep you out of debt, but they typically aren’t reported to the credit bureaus. This can make it tough to boost or establish your credit.
If you have significant financial milestones you’re ready to achieve, such as taking out a car loan, it may be time to consider a change.
Without a credit history, you are a wild card, explains Jeanette Pavini, consumer savings expert for Coupons.com. “A landlord, a car salesman or a credit card company doesn’t know if you’re capable of paying your bills on time. They don’t have any proof that you can be responsible with your finances.”
To build credit, consider starting with a simple credit card. Then charge 1 item you use each month, and pay it off right away.
When starting out with credit, look at your credit reports, suggests Pavini. “Even if you don’t think you have a credit history, checking is important so you can identify any fraud or dispute errors on your account.”
This is particularly important if you’re applying for credit for the first time. Some identity thieves actually target younger consumers because they know it’s unlikely their credit history is being monitored, explains Pavini. Get your free credit report from myBankrate.
If you find you need to write more checks, need flexibility in how you spend your money or want to monitor your cash at a glance, it may be time to think about getting a checking account.
“Checking accounts, and their associated debit cards, have benefits that many prepaid cards do not,” says Molly Steele, assistant vice president of debit cards at Navy Federal Credit Union:
There’s more flexibility in what form your money takes. You can take out cash, write a check, make a debit card payment or move funds electronically through an automated clearinghouse, or ACH.
There are fewer hurdles. A prepaid card requires you to load funds. With a regular debit card, once the money is in your checking account, you can use the card without taking additional steps.
Depending on your bank, you may find it easier to follow your spending and transactions.
“Debit cards put the consumer in control because money comes directly out of their checking account, and most financial institutions have a complete transaction history available online or through a mobile device,” Steele says.
Prepaid debit cards generally come with a list of fees you’ll need to pay, starting with a fee to initially purchase the card. You might also face a monthly fee, as well as charges when you load money, check the balance or use an ATM that is not in the card network.
You might even need to pay an inactivity fee if you don’t regularly use the account.
Some checking accounts offer much lower fees and additional savings perks, such as ATM rebates, Steele says. And Bankrate’s most recent checking survey found that 38% of noninterest checking accounts are actually free, with no monthly maintenance fees or other requirements.
Keep in mind that banks will want you to approve overdraft protection, which will allow you to spend more than you have in your account — for a hefty fee. Don’t. To avoid this, tell your bank you don’t want overdraft protection, suggests Debbi King, personal finance coach and author of “The ABC’s of Personal Finance.”
This way, your account operates similar to a prepaid debit card. “Your limit is your balance and if you try to spend more, your transaction will be denied,” King says.
Prepaid cards can help you learn a great deal about spending and living within your means. Once you’ve learned these key principles, chances are you’ll start thinking about the next steps, such as saving more.
If you’ve had trouble with credit in the past, however, you’ll want to first make sure you’re able to open a new account. Consider getting a copy of your banking history report from ChexSystems and Early Warning Services, 2 consumer reporting agencies, suggests Harrine Freeman, CEO of H.E. Freeman Enterprises, a credit repair and financial counseling service in Bethesda, Maryland. Also ensure balances from old accounts have been paid.
Getting a savings account first may be the best bet. “Once you open a savings account, you may be able to qualify for a checking account,” Freeman says.
Once you’ve established a way to manage your day-to-day expenses, earning credit card rewards might be an appealing bonus for your regular shopping.
Before trying other options, “the key is to be comfortable with your budget,” notes Tami Farrow, head of retail deposit payments at TD Bank.
You’ll also want to understand the process of moving into a rewards system. If you begin with a simple credit card or a secured credit card, you likely won’t be eligible for a long list of rewards immediately.
Using the card and paying it off can lead to more opportunities. “As you build a credit history, you will be more likely to qualify for cards that offer higher rewards and a lower interest rate,” says Pavini.
The rewards can add up: In addition to cash or airline miles, some cards offer free extended warranties on purchases, free movie tickets and presale tickets to concerts.
To streamline your credit card use, consider connecting it to an auto-pay account. For instance, you could have the card pay for your monthly gym membership. Then you pay off your credit card each month.
To avoid the pitfall of spending too much, “get in the habit of logging in to your online banking every morning and just glancing at your balance,” suggests Coupons.com’s Pavini.
If you used prepaid debit cards during college, they may have helped you learn to budget and manage money wisely.
“Parents use prepaid cards to teach their children — teen or college-age — responsible spending,” says MetaBank’s Hanson.
But when you start working, it is an ideal time to open a checking account and begin establishing a relationship with a financial institution, notes Steele.
Around this time, you may be thinking about other big steps, like making student loan payments, purchasing a car or renting a place for the first time. All of these can be goals to work toward after moving on from a prepaid debit card.
“It’s a lot to manage at first,” says Farrow. “Choosing the right option or mix of options, such as prepaid debit, checking and savings, is important.”