In the past few years, prepaid cards, sometimes called prepaid debit cards, has risen in popularity. These cards are often advertised as a credit or checking account alternative for people with bad credit or no credit. However, these cards aren’t necessarily what they seem to be.

Prepaid cards aren’t credit cards. While prepaid cards look almost just like credit cards and you swipe them the same way you’d swipe a credit card, the cards aren’t credit cards. The reason you can get approved for a prepaid card with no regard to your credit history is because you’re not being extended credit. Instead, your prepaid card used to access money you’ve deposited onto the account (or money someone has deposited on your behalf).

On the plus side, that prepaid cards aren’t credit cards can be a good thing. You don’t have to worry about a monthly payment or late payment fees. There’s no interest rate to consider or finance charges to pay. And there’s no risk of going into debt since you generally can’t spend more than what you have in your account.

Prepaid cards don’t help you build credit. Because a prepaid card isn’t a credit card, it’s not reported to the credit bureaus. Managing your prepaid balance doesn’t help your credit score. Some prepaid cards promise to report some bills payments to an alternative credit bureau, Payment Reporting Builds Credit or PRBC. However, this isn’t a major credit bureau and there’s almost a small chance that creditors and lenders will use this credit information to approve your application.

Suze Orman’s Approved Card, for example, advertises that transaction data is reported to TransUnion, one of the major credit bureaus. But, that data is reported anonymously, is not tied to your credit profile, and isn’t included on your credit report.

Prepaid cards are cheaper than checking accounts. While it’s true that many banks have begun imposing fees on checking accounts, prepaid cards can be, and often are, more expensive. For example, you may have to pay a fee to load cash onto a prepaid card whereas it’s typically free to deposit cash into your checking account. A NerdWallet survey in 2012, revealed that the average prepaid card costs almost $300 a year. Meanwhile, average monthly checking account fees are only $110 a year.

Fortunately, some prepaid card fees can be avoided based on how you use your card. For example, your monthly fee may be waived if you have a direct deposit over a certain amount each month. You may be able to avoid ATM withdrawal fees by using certain network ATMs. The key to avoiding fees is understanding when these fees are charged and avoiding those types of transactions.

Prepaid cards are protected by law. Prepaid cards aren’t credit cards, so they don’t fall under credit card rules. So prepaid card issuers aren’t required to disclose their fees or solve any billing errors under the Credit CARD Act or the Fair Credit Billing Act. They’re also not connected to a checking account, so the FDIC may not cover your deposits. In addition, your prepaid card funds may not be covered for fraudulent or unauthorized transactions. Make sure you read fine print to discover what protections your card issuer provides you with.

Experts predict that use of prepaid cards will continue to increase. Certainly, there’s a place for these cards on the market. But, it’s important that prepaid cardholders understand what they’re getting – and especially what they’re not getting – when they sign up for this particular financial product.

Source: CNNMoney.com