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4 myths about prepaid cards

Confusion exists about the difference between prepaid and traditional debit cards. Here are some facts that can help you.

By MSN Money Partner Mar 2, 2012 1:44PM

This post comes from Jeanine Skowronski at partner site MainStreet.


MainStreet on MSN MoneyWhile the ostensible difference between a prepaid debit card and an actual debit card seems fairly straightforward -- debit cards are linked to traditional checking accounts, prepaid cards are not -- an impromptu survey MainStreet conducted on Twitter and Facebook revealed that some consumer confusion persists.


We thought we'd break down some key differences between the two that consumers need to be aware of.

Myth: Prepaid debit cards are subject to the same regulations as debit cards.

One of the reasons behind the blurring of the line between traditional and prepaid debit cards is that prepaid products were exempt from the Durbin Amendment to the Dodd-Frank financial reforms of 2010, which ultimately imposed a 21-cent cap on swipe fees charged to merchants when a customer uses his or her debit card.


While the Durbin Amendment itself doesn't affect what the consumer is charged, it does give banks and card issuers an incentive to push their prepaid products, meaning that consumers need to be aware of the product's nuances.


Also important to note is that neither prepaid debit cards nor traditional debit cards are subject to the Credit Card Accountability, Responsibility and Disclosure Act, which enforces, among other things, transparency in regard to a product's fee structure. (Post continues below.)

Myth: A prepaid card can be overdrawn.

One reason prepaid products became so popular for the "underbanked" in recent years is that they present a way to avoid bank overdraft fees. But while you may not incur a $30 charge for spending more than what's in your account, you could easily run through the funds thanks to other fees that don't apply to traditional debit accounts. Some prepaid providers, for instance, charge for customer service calls or paper statement requests and you often are charged to reload money onto the cards.


Myth: Fees associated with prepaid cards are unavoidable.

There are ways to minimize the damage a product's fee structure can do your wallet. For instance, you can set up direct deposit onto your card, use the provider's online banking options and only use ATMs in your provider's network. These tactics may not eliminate all of the fees that come with a prepaid product, but it could make a significant dent in the monthly costs.

Myth: Prepaid debit cards help you build credit.

Suze Orman was accused of perpetuating the myth that prepaid cards can help improve your credit rating when she introduced her Approved Card and touted its loosely defined partnership with TransUnion in January, but the truth is that she's not the only person to pair a prepaid product with credit monitoring. The READY Debit Platinum Visa Prepaid Card also gives cardholders access to a credit score tracker, despite the fact that the card itself won't affect the score.


This is because major credit bureaus exclude information on prepaid and traditional debit cards from credit reports, since they are not actually backed by a credit line. The distinction is important to note, since those looking to build credit are better off applying for a secured card, which requires customers to put down a sum of money upfront to cover the line of credit and thereby minimize the risk of default.


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