Are prepaid cards right for you?

What is a prepaid card?

A prepaid card is a type of debit card, similar to a reloadable gift card or stored value card. You can load it with a cash balance and use it anywhere a particular card network (Mastercard, Visa, Discover or American Express) is accepted. Here’s why you might want to consider one.

Key points to remember

  • Prepaid cards are a form of debit card in which you spend money that you have already loaded onto the card.
  • As prepaid cards spread among “unbanked” consumers, some people are using them in tandem with a checking account to limit their discretionary spending.
  • Issuers can charge installation, top-up and purchase fees, in addition to a fixed monthly fee. It is a good idea to understand exactly what these fees are before purchasing a card.

How prepaid cards work

You can buy prepaid debit cards at supermarkets, convenience stores, and many other outlets, as well as directly from the companies that issue them. Since there is no credit involved – you can only spend the money you put on the card – no credit check is required to get one. While a poor credit history doesn’t hamper your chances of getting a prepaid card, having one doesn’t help you improve your business either. credit score. (Neither can a regular debit card, as debit card expenses are not reported to the credit bureaus.)

You load money onto your card, either at an ATM, at a participating store, or by direct deposit. Prepaid cards have account and routing numbers, which can be used to arrange direct deposit for your paycheck or government benefits.

After that, you use your card in the same way as a regular debit or credit card. You can shop in-store and online, pay bills, or withdraw money from an ATM. Many companies that offer these cards have apps you can use to track your balance, review your transactions, and transfer funds.

Once your balance is used up, or at any other time you wish, you can top up the card with additional money.

Unlike a regular debit card, you don’t need a bank account to have a prepaid debit card. For this reason, these cards are widely used by unbanked adults, who can’t or don’t want a traditional bank account, but sometimes need an alternative to paying in cash. With cashless transactions becoming more and more ubiquitous, it’s hard to avoid carrying some sort of card today.

Benefits of prepaid cards

While prepaid cards work in many ways like a typical debit or credit card, they do offer some advantages over these and other payment methods. Among them:

Prevent overspending

Prepaid cards can be a good way to avoid debt because you can’t spend more than the amount you’ve already deposited. They are also a useful budgeting tool. Even if you have a checking account, you can put a set amount on a prepaid card each month for certain categories of expenses, like dining out. When your allowance for the month goes down, that’s it until next month.

Avoid overdraft fees

Banks have no problem slapping customers with hefty penalties for overdrafting a checking account. Nationwide average overdraft fees exceeded $ 33 per transaction last year, according to research firm Moebs Services.Some banks will allow you to turn off overdraft protection (in this case, your debit card will simply be declined if you don’t have enough money to cover a transaction), but it can be even easier to get the credit. one of the many prepaid cards that never charge this fee at all.

Limit losses

You cannot lose more than your prepaid card balance, even if you are a victim of fraudsters. If you use a debit card instead, its liability protection probably covers you, but some consumers prefer to use a prepaid card when making an online or in-store transaction, rather than endangering their checking account.

Since April 1, 2019, cards marketed as “prepaid” are covered by the Electronic Funds Transfer Act; This means that card issuers should investigate and reimburse you for unauthorized charges or errors as long as you file a timely report. You can also benefit from certain additional protections offered by the card network. However, to benefit from these benefits, you must register the card with the issuer.

In addition, most cards are FDIC insured, protecting balances up to $ 250,000 against bank failure (again, you must register your card to get coverage). Issuers must provide a warning if they do not offer FDIC insurance.

Overcoming a Bad Banking History

If you left your last bank with unpaid fees, it might come back to haunt you when you try to open a checking account at another institution. Banks order a bank history report before allowing you to open an account, which will display all previous accounts that have been “closed for cause”. Prepaid cards do not require such checks, so this is one way to get a debit card, even if other lanes are closed to you.

Teach children to manage their money

Prepaid cards are a handy tool for teaching children to manage their money and navigate an increasingly cashless economy. Some prepaid cards specialize in this market, making it easy for parents to put a child allowance or other money on the card.

Collect rewards

Some prepaid card issuers even have rewards programs just like credit cards. The American Express Serve Cash Back card, for example, offers unlimited 1% cash back on all purchases.Walmart MoneyCard offers 3% Cash Back at and in the Walmart App, 2% Cash Back at Walmart gas stations and 1% Cash Back at Walmart stores, up to $ 75 per year.

Disadvantages of prepaid cards

While they can be useful under the right circumstances, prepaid cards also have a few drawbacks.

No credit report

As mentioned above, prepaid cards, like other debit cards, do not share your transaction information with credit bureaus, so they have no value if you are trying to build a credit history or improve your credit score. In that case, you might be better off requesting a secure credit card. It is a special type of credit card for people with little or no credit history. A good secure card will report your bill payments to the three major credit bureaus.

Fresh – and a lot of them

Depending on the card you choose, you may need to pay activation fees, monthly fees, transaction fees, and top-up fees. Some even assess the inactivity fee if you don’t use your card for an extended period of time. Needless to say, the fees can add up quickly and deplete your card balance.

Take the Visa Green Dot 5% Cash Back debit card. While its 5% cash back is generous, the card charges up to $ 1.95 for in-store purchases, up to $ 4.95 to top up your balance in a cash register, and $ 3.00 for cash back. ATM withdrawals, in addition to its monthly service charge of $ 9.95.

The Consumer Financial Protection Bureau implemented new rules in 2019 to make it easier to compare fees on prepaid cards. Now, issuers must provide a table showing the card charges on the outside of the card packaging, as well as more detailed information on the inside.They should also post information about the fees online on the company’s website.

The bottom line

If you’re looking to control your spending and avoid credit card debt, or if you’re having trouble getting another type of card, a prepaid card might be the way to go. There is a myriad options on the market, so look for the ones that are easy to use and top up without paying a fortune in fees.

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