Pros and Cons of Prepaid Tax Refund Debit Cards

If you’re looking forward to a tax refund this year, your tax preparer may give you the option of receiving it in the form of a prepaid debit card. While that might seem like a great convenience, there are some downsides to consider. This article explores the pros and cons of prepaid tax refund debit cards.

Advantages of Tax Refund Debit Cards

Tax preparation services like H&R Block, Jackson Hewitt, TaxAct, and TurboTax all make prepaid cards available to their customers. Proponents of the cards point to these advantages:

If you don’t have a bank account. The lack of a bank account rules out receiving your refund by direct deposit that way. You might still receive it in the form of a check, but you’ll have to cash that check somewhere. While the laws vary by state, check-cashing stores, such as payday loan companies, often charge about 3% of the check’s face value for this service. So if you’re getting a $3,000 refund, you might walk away with only $2,910. (Note that if you do have to cash a check and don’t have a relationship with a bank, some big-box stores, like Walmart, and major grocery chains, like Kroger, cash checks for much lower fees, typically under $10.)

If you want your refund a bit sooner. Having the U.S. Treasury Department directly deposit your tax refund, either into a bank account or onto a prepaid debit card, is usually faster than waiting for a refund check to arrive in the mail. According to H&R Block, if you e-file your return, you can typically expect a direct deposit within 21 days, while a check may take 21 to 28 days. If you file a paper tax return, the wait will be longer because of the time involved in processing paper returns.

If you don’t trust the mail. Checks can get lost in the mail, of course, and that could be a particular problem if you’ve recently moved. Thieves have also been known to break into mailboxes around tax time looking for refund checks.

Disadvantages of Tax Refund Debit Cards

If you don’t have a bank account, receiving your refund on a prepaid debit card can be convenient. However, that convenience comes with a cost, which is the primary disadvantage of prepaid debit cards:

Fees may be high. H&R Block’s Emerald Prepaid Mastercard, for example, charges a $3 fee for using the card to get cash at an automated teller machine (ATM) and an inactivity fee of $4.95 a month of you haven’t used your card for 60 days, among other fees. TurboTax’s Turbo Prepaid Visa Card charges $4.95 a month unless you’ve loaded at least $1,000 on it in the preceding month (the first monthly fee is waived regardless of the amount); in-network ATM withdrawals are free, but out-of-network ones cost $2.50.

There are some things that you can do to minimize your fees. First, check the card agreement to make sure you understand the fee structure. If you have H&R Block’s card, for example, you’ll want to make sure you use it at least once every 60 days to avoid the monthly fees. With the TurboTax card, if you aren’t able to load another $1,000 on it each month (such as through direct deposit of your paycheck), you may want to spend down your balance in as few months as possible.

An even better alternative may be to open a bank or credit union account, even if you previously believed that you didn’t have enough money to be eligible for one. For example, some credit unions, designated as low-income credit unions (LICUs), have low minimum balance requirements, offer check cashing services, and even make small loans.

The Bottom Line

Receiving your tax refund through a prepaid debit card can be convenient and a little faster than waiting for a check, and it is an option for people who don’t have a bank account. However, you also may be subject to numerous fees, which will whittle away at your refund. If you decide to go this route, be sure to read the card agreement so that you can avoid as many fees as possible.