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The Rise of the Prepaid Debit Card

If there’s one person we regularly look to for money advice, it’s Justin Bieber.

With his squeal-inducing face on the cover of the new SpendSmart card, the Biebs joins a long list of celebrities endorsing prepaid debit cards. These cards allow you to upload and spend money like a normal debit card, without the nuisance of handling cash or opening a bank account. Even better? You can’t spend more than you upload, which means overdraft fees are a thing of the past.

It almost sounds like the skills of budgeting and smart money management aren’t necessary if you’ve got the right kind of plastic. Maybe Justin Bieber, Kim Kardashian and Suze Orman really do know what they’re talking about.

Who are we kidding, right?

Fee Frenzy

Yes, it’s true. You can dodge a possible $35 overdraft fee by getting a prepaid debit card. All you have to do in exchange is pay the service fees. The types of fees and amounts charged on each card vary, but you can expect most fees to be under $3, with a few in the $6 to $10 range.

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Doesn’t sound too bad? Well, there’s a catch.

Depending on your card of choice, you might be charged for any of the following: buying the card, monthly maintenance, uploading money, inactivity, ATM withdrawal, card decline, making a purchase in-store or online, speaking with a customer service representative, and even using the automated customer service system. Most cards acknowledge at least seven, and up to 15, regular fees. At nearly $3 a pop, these charges add up fast.

Sweet young Justin’s card, among other things, charges users 50 cents just to check their account balance. Now why would he agree to be part of something like that?

Money, Money, Money, Money. Money!

The prepaid debit card industry is big business. This year alone, users are expected to load $201.9 billion onto these cards.

Prepaid debit cards originally targeted people without bank accounts, who saw the cards as a convenient and reliable way to manage their money without getting into trouble. Unfortunately, most cards take advantage of the poor and financially struggling much like their destructive cousin, the payday loan.

In recent years, though, these cards have been gaining popularity with average Americans. From June 2011 to June 2012, 47% of U.S. families bought a prepaid debit card. With fees charged at almost every action and transaction, celebrities and banks are lining their pockets with our poor decisions.

Keep Your Cash

This season, you may see all kinds of new prepaid cards: one to hold your tax refund, another to receive IRA distributions, and even cards for your kids’ allowance. Learn to recognize this as the marketing ploy it is. You don’t need a special card for special income—and you certainly don’t need a hip young face to teach your teens how to handle money.

Instead, use a regular checking account. If you shop around at local banks and credit unions, you can find plenty of free or inexpensive options. And for goodness’ sake, stick to the budget. A well-managed account is the best—and only—way to avoid crazy fees.

As Dave teaches, recognizing money myths and replacing them with truth is a powerful way to take hold of your greatest wealth-building tool: your income. What do you think about prepaid debit cards?

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