Prepaid Credit Cards – What to Know

Did you know?

21% more people are using prepaid credit cards each year?  It’s true.  They are rapidly becoming one of the most popular alternatives to bank accounts and traditional credit cards. 

 

Why?

            Bank accounts and traditional credit cards are becoming harder and more expensive to obtain.  They’re also popular items for parents to purchase for their kids.

 

What’s Good About Them?

            They allow users to make purchases through the large credit companies like Visa and Mastercard without the hassle of a bank account.  You can also reap the benefits of their rewards programs if you use them wisely. 

 

What’s Bad About Them?

            Hidden fees.  Here’s a brief, and non-exhaustive list of the things you can be charged for when using a prepaid card.

–          Monthly fees

–          Per transaction fees

–          Deposit fees

–          ATM fees

  • *In addition to those charged by the ATM owner

–          Overdraft fees

–          Balance inquiry fees

–          Cancellation fees (to get your money back)

–          Dormancy fees (for not using the card enough)

–          Payment fees

–          Transaction report fees

  • Usually you have to opt out of these

–          Customer service fees

–          Other fees

 

            Prepaid cards don’t build your credit. 

It’s a common misunderstanding that using a prepaid card will improve your credit rating and credit scores.  This is not actually the case.  Because card users aren’t actually borrowing any money, the credit agencies don’t care about prepaid card use.

 

            Prepaid cards don’t offer fraud protection.

This is only partially true.  Normal credit cards offer fraud protection.  In the event that a card is lost or stolen, the card user is not responsible if he or she reports the fraud in a timely manner.  With prepaid cards there is occasionally some protection, but it is not nearly as comprehensive as with a regular credit card.

 

            Prepaid cards aren’t insured by the government.

When you deposit your money in a bank account, that money is insured by the federal government.  For instance, if your bank goes out of business, the government will guarantee that your money will not be lost.  If your prepaid credit card provider goes out of business, however, that money is not insured by the federal government, and you could lose all of it.

http://bucks.blogs.nytimes.com/2013/03/12/prepaid-cards-may-lack-protections-of-checking-accounts/?ref=business

 

Advice

  • If you’re a current user of prepaid cards, or if you’re considering using one, be very careful about selecting the right card, and be careful with how you use it.  My next post will focus on how to select the right card.  For a more detailed description of prepaid cards and the fees they charge, see: http://www.consumersunion.org/pdf/Prepaid_Cards_Report_2012.pdf

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