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Alternative Card Options for Students: Debit or Prepaid?

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For many college-bound students that are too young to qualify for a traditional credit card, the need to manage money often boils down to either using a prepaid or debit card.  Both have similar characteristics, but depending on your financial habits, one may be a better fit. Let’s take a closer look:

Debit Cards

Debit cards provide users access to their bank checking and/or savings accounts. They can be used to make purchases both online and offline, and money can be withdrawn at ATMs and at cash-back swipe machines found at some retailers. If you have overdraft protection on your debit card, you will be charged a fee each time you withdraw more than the available balance in your account. The charge can be as high as $35 per overdraft, so best to opt-out of this feature to avoid the fee. ATM withdrawal fees for debit cards are also pricey; if you don’t use your bank’s ATM, you could pay up to $4 per withdrawal (including the ATM’s own fee and your bank’s out-of-network fee).

[Related: Under 18? No Credit Card For You!]

Prepaid Cards

Prepaid cards are like reloadable gift cards issued by financial companies like Visa, MasterCard and American Express, that can be used wherever credit cards are accepted. For those who are unable to open a bank account, prepaid cards offer an alternative way to manage money and directly deposit paychecks, but they, too, have their fair share of fees. A Consumers Union report found that activation fees, on average, can be as high as $39.95 and initial load requirements range from $10 to $20 on the card at the time of purchase. Monthly fees, meantime, range up to $10 per month. Typical ATM fees also apply. An exception to this fee-heavy trend is the new American Express prepaid card which has no sign-up fee and only charges for ATM withdrawals (past the first free one provided each month).

Which is Best For You?

In most cases, the debit card is your best bet. They offer the advantage of being tied to a bank account, where your funds earn interest (albeit, not much at the moment). They also carry fewer fees, as long as you opt-out of overdraft protection and limit ATM withdrawals to those affiliated with your bank.

[Related: Three Misconceptions About Prepaid Cards]

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