Guide to Prepaid Debit Cards: Pros & Cons, Hidden Fees & More

The popularity of prepaid cards is skyrocketing. An estimated 23 million adults use them regularly — at the gas pump, the grocery checkout, the ATM, and even for direct deposit or to pay bills. Consumers buy prepaid cards, then use them like debit cards, making them a handy financial tool. But they're not without hazards. Let's look at the pros and cons of prepaid cards, how to choose them wisely and what mistakes to avoid, especially when it comes to hidden and potentially costly fees.

Hank has had a run of financial bad luck lately, causing a serious ding to his credit score, and he can't qualify for a credit card. He doesn't want to carry wads of cash in his pockets, though, so he uses his paycheck to buy prepaid cards for his everyday purchases and even to pay his bills.

Pam sometimes has trouble keeping tabs on her account balance. Tired of paying hefty overdraft fees, her solution is to use prepaid cards to avoid spending more than she has. She would rather have a purchase denied than pay another penalty fee.

Retired teachers Patricia and Sam live comfortably on their retirement incomes, as long as they keep a close eye on their finances and don't overspend. To help in that effort, the couple uses prepaid cards loaded with specific amounts for weekly groceries and entertainment. It's a good idea to keep a rein on their budget.

Jack and Ella are about to send their eldest child off to college. This will be the first time daughter Annie will be on her own — and handling her own finances. Mom and Dad decide to equip Annie with a prepaid card loaded with a finite amount of cash. They see it as a way for Annie to practice using credit while keeping her spending in check, and it protects them from the risk of her unwittingly racking up a mountain of debt.

Marcie is a keen online shopper, regularly scouring people-to-people marketplaces on the internet for collectibles, books and handcrafted items. Paying by cash is out of the question, and she feels more secure and more comfortably anonymous using prepaid cards rather than her personal credit card online.

Jack is fresh out of high school, still deciding where life will take him next. While he takes some time to mull his options, Jack works at a minimum-wage job. His take-home salary is too low to counter the low-balance fees of a traditional bank checking account, so he has his paycheck directly deposited onto a prepaid card.

In the neighborhood where Lauren and Steve live, there are no bank branches. Rather than go out of their way every time they need cash, they keep prepaid cards handy for their everyday purchases.

Not long ago, your choices to pay for goods or services were cash, checks or credit cards. Today, many consumers reach for prepaid cards. In fact, prepaid cards are among the fastest-growing consumer financial products in the U.S., according to the Consumer Financial Protection Bureau (CFPB). Consumers put nearly $65 billion on "general-purpose reloadable" (GPR) prepaid cards in 2012; that was predicted to almost double to $112 billion by 2018.

Prepaid cards are easy to get and can be a convenient alternative to cash, checks or credit cards. Known officially as "general-purpose reloadable" and sometimes as prepaid debit cards or prepaid credit cards, prepaid cards are loaded with cash. They can be used at ATMs for withdrawals and to purchase just about anything in person or online, similar to debit cards tied to checking accounts.

People who do not have a checking or savings accounts, or who use them very little, used to be the main users of prepaid cards. But prepaid-card usage is becoming more common, growing more than 50 percent between 2012 and 2014, driven primarily by increased adoption among those consumers who do have bank accounts.

While the above are the top three most commonly used prepaid cards, others include government benefit cards that pay unemployment benefits, child support and other benefits; public transit system cards; and some college ID cards.

At this point, you may be wondering how prepaid cards differ from debit and credit cards. They may look alike, but they all function differently.

All prepaid cards are different and may charge varying fees, from a charge for each time you use the card to make a purchase to a fee for using it to withdraw cash from an ATM. These fees can add up quickly, eating away at the balance of money you've loaded onto the card. It's important to read the fine print to find the best deal. Look for information on the card, inside the card package or at the card issuer's website

Some activities your card provider might charge for and a range of their associated fees include:

• Card purchase and/or activation: $0-$30
• Card reload: $0-$5
• Monthly service: $0-$9.95
• Purchase transaction: $0.49-$2
• ATM withdrawal: $1-$3
• Inactivity: $2-$5.95/month
• Balance inquiry: $0.49-$2
• Paper statement: $0-$5.95+
• Lost card replacement: $10+
• Card cancellation: $10+
• Overdraft: $15+

Other possible fee-incurring activities include:

• Bill payment
• Additional card
• Inactivity
• Stop payment
• Decline
• Card-to-card transfer
• Foreign transaction

Sources: CFPB and knowyourcard.org

The advantages and disadvantages of prepaid-card use varies widely by card. Following are some issues to consider when purchasing a prepaid card; not all cards have all the pros nor all the cons listed below.