There are two types of debit cards. The first well-known type of debit card enables spending by a card holder by connecting him to his account at a bank or financial institution. As soon as the card is swiped, the account is debited with the amount spent. So, you can spend as much as you have in your account, nothing more.
White collar workers are the highest users of this debit card. The salary gets credited into their account – the bank gives them a debit card – they use the debit card per their financial planning.
The second type of debit card is a Prepaid Debit Card, which works just like a prepaid phone card. The card holder has to deposit funds with the card issuer and create a balance in his account so he can use the card. This type of debit card works best for people without bank accounts who do not want to lug cash around. It also works for companies where employees have to spend on behalf of the business and get reimbursed. Instead of tallying accounts provided by different employees, the company can equip them with a prepaid debit card.
Advantages of a prepaid debit card
1. People who do not qualify for a credit card can work with a prepaid debit card.
2. These cards can be used by parents to dole out pocket money to their children and then monitor how the child spends his pocket money by checking the debit card statement. The child too then starts spending responsibly and learns about finances.
3. Using these cards works better than writing checks because suppliers/vendors may not supply goods or services to a buyer on the basis of his check because vendors are usually wary of the check returning. Prepaid credit cards can come to the rescue of the buyer (and vendors) in such cases.
4. These cards help cut down on transaction time as well. For example, if a buyer hands over a check, then it does take some time for it to realise. A prepaid debut card transfers funds to the vendor’s account immediately. A prepaid debit card keeps the economic wheels turning.
5. There are no bank charges associated with a prepaid debit card. On the other hand, a credit card statement is adorned with all sorts of charges.
6. These cards help people stay within their budget. Card holders can change their card based on their financial planning and ensure that they do not overspend.
Disadvantages of a prepaid debit card
1. These cards are not flexible – you cannot spend a dollar more than your deposit, and that can be a dampener when there is an emergency.
2. Banks have now started charging over-limit fees and non-sufficient funds fees for such cards (in certain cases).
3. If the card holder’s PIN is hacked then the hacker can clean out the funds from his account and there’s nothing much the card holder can do except for lodging a police complaint. If this happens with a credit card, the customer can dispute fraudulent transactions without losing any money (because he has yet to pay the credit card bill).
These were the pros and cons of a prepaid debit card. A prepaid debit card works very well in certain situations (students, budgeted spends, monitored spends, etc.). Use it only after assessing your need.