Why Get a Prepaid Credit Card?
For all the bad press prepaid credit cards get, they can be a helpful option for many people who don't want a traditional credit card. Whether you don't qualify for credit, can't get a bank checking account because of past credit issues, or you want to control your spending, a prepaid credit card could be your money-management solution. You can read more about the benefits and downsides in our articles about prepaid credit cards.
General-purpose, reloadable prepaid cards, as they're known formally in the banking industry, are not actually credit cards, nor are they debit cards in the traditional sense. No one lends you money: You deposit money to the card and then use it as you see fit. Prepaid cards are not linked to a banking account either, so you aren't pulling money from an account that allows you to overcharge. It's essentially cash in plastic form.
In today's society, a credit or debit card is practically a necessity – try to book an airline ticket, rent a car or reserve a hotel room without the ubiquitous plastic card. Not only do these businesses use credit cards as a guarantee of payment for reservations and to pay for incidental and unexpected charges, but in today’s environment of heightened security concerns, they are an indispensable means of identifying legitimate customers. Some of the Prepaid Credit Cards that are available are from NetSpend, RushCard and SilverCard.
These are all reasons why prepaid credit cards exist, but the list of pros and cons are nearly equal. Finding free prepaid credit cards is a feat, but if you meet a few qualifications, you can reduce the cost of fees or even eliminate them altogether.
Pros of Prepaid Credit Cards
According to a recent Pew Charitable Trust survey, about 12 million people in the United States use prepaid cards at least once per month. The main reason people surveyed said they use them rather than credit or banking accounts is because they are trying to avoid repeating financial mistakes made in the past. Several benefits are associated with prepaid cards. Here are a few:
Your prepaid credit card isn't actually a credit card, so you're not borrowing money based on your ability to pay it back later. As such, the prepaid card companies cannot charge you interest. This means you won't owe any money based on the amount of money you spend. The money on your prepaid card is already yours.
A prepaid card prevents you from spending money you don't have. If you've run into issues before, such as overspending and not having the funds in your bank account to cover a transaction, then you know it can lead to overdraft fees. Most prepaid credit card companies won't let you complete a transaction if you don't have the money already loaded on the card.
No Credit Checks
If you're unlikely to be approved for a traditional credit card, you want to avoid credit checks. Whether you have poor credit, no credit, or are trying to repair your credit, a hard check on your credit report can inflict damage to your credit score. Prepaid card companies approve anyone who can afford to pay their fees and load money onto a card. You aren't borrowing money, and you're usually not able to dip into the red, so there's no risk associated for the company or for you.
Credit Card Without Debt
Many people who use prepaid cards are doing so to avoid going into debt. If you know you overspend, a traditional credit card could be tempting fate. Prepaid cards don't feed your tendency to spend, so you can avoid spending money you don't have. With a prepaid card, you get the benefits of having a traditional card, such as reserving a car, hotel room or airplane ticket with no problem, as long as you have the money for it.
No Need to Carry Cash
A large influx of cash is both a great and stressful situation. You have the money you need to pay bills and buy the things you need and want, but what do you do with all of that cash if you don't have a bank account? A prepaid card is a great way to sock that money away and not have to carry a large amount of cash in your wallet.
Online Shopping & Anonymity
Although you need to prove your identity when you acquire a prepaid card, your information, such as a Social Security number, address, or bank account, is not tied to the prepaid card. This means you can shop online with the prepaid credit card without worrying about identity theft or consumer fraud.
Banks that offer checking and savings accounts require more than just identifying information. If you've had trouble with overdraft fees in the past, you may not be eligible for a checking account. Credit cards are only available to those with acceptable credit scores, and if yours is low or nonexistent, you may not be able to get one. As long as you can pay for the use of a prepaid card and you can prove your identity, you qualify for a prepaid credit card.
Cons of Prepaid Credit Cards
Although there are many benefits to using a prepaid credit or debit card, there are limitations too. Most notably are the fees, but you also can't build credit with a prepaid card. Additionally, if a registered card is lost or stolen, the issuer is not governed by the same rules as banks and credit card companies, so you may lose your money for good.
The sad reality of using a secured credit card, or debit card as they're more accurately called, is that there seems to be a charge for just about everything. There is typically an activation fee and a monthly fee. Many companies also charge for ATM cash withdrawals – in addition to the fee a bank's ATM may charge.
A few card issuers also charge fees if you want a printed monthly statement, call customer service, or if you need to replace a lost or stolen card. Some charge inactivity fees if the card isn't used for a certain period, typically 60 or 90 days. If you need to use your card outside of the country, you can, but expect a typical conversion fee with each transaction.
Direct deposit is one of the most advantageous ways to make deposits to a prepaid credit card, but if your employer does not offer direct deposit, there are other methods to load money to your card.
You can transfer money directly to your card from your bank or make cash deposits through agents such as Western Union, MoneyGram and Green Dot. These outlets are frequently located at the customer service counter of major retailers like Wal-Mart, Kmart and Target as well as at grocery and pharmacy chains, convenience stores, and check-cashing businesses. These agencies will charge you a fee for the cash-loading service or card though.
Although many people use prepaid credit cards as a way to avoid overdraft fees, some prepaid credit card companies offer overdraft protection if you accidently overspend. This, of course, will cost you either an upfront fee, or an overdraft fee, and you still have to pay the transaction amount.
No Credit Reporting
You can use a prepaid card just as you would a regular debit or credit card. You can make purchases at brick-and-mortar retail shops, online and pay your bills. However, despite all of your responsible spending, you won't earn any credit with a prepaid card. None of the companies report your activity to the credit agencies that determine your credit score.
Fewer Consumer Protections
General-purpose reloadable cards are not covered by the same laws that require banks and lenders to disclose all fees or that absolve them of liability in the event your card is stolen. You could find that the card issuer makes sudden changes and you're paying higher fees or that you no longer have a prepaid card. This is because prepaid card companies are not subject to the same laws that require banks to provide at least 21 days' notice of changes to terms.
Inconvenient Balance Checks
Most prepaid cards operate in the same way as a credit card or debit card in that you can check your account balance online. Usually it's free, as long as you've set up an online account and have internet access. However, if you prefer a paper statement and want to check your balance at an ATM or call to find out how much money you have left, you may have to pay a steep fee.
How to Manage Money With a Prepaid Card
If you shop around, you can find a prepaid card that works for you and meets your needs so you can effectively manage your money. There are other ways a prepaid card can help you, such as introducing money management to your children, curbing your spending while on vacation and sticking to a budget.
Teach Your Children About Money
Prepaid credit cards can be a great way to help a child or teen learn how to manage their money. You can load their monthly allowance to the card and help them understand how to use it, check the balance and budget their money. The benefit to using a prepaid card is that your teen won't rack up debt or overdraft fees. If they try to purchase an item they don't have money for, the transaction is denied. They also learn about fees, budgeting and responsible spending.
Travel With Confidence
Prepaid credit cards are a good way to limit your spending while on vacation, and it can prevent further loss of funds in the case of theft – thieves won't have access to your entire bank account if they get hold of a prepaid card. However, prepaid cards aren't subject to the same rules as banks and credit card companies, so you may not be able to recover losses due to theft. In most cases where you lose your card, you should consider it cash that's unrecoverable.
Budget Your Funds
When you want to ensure that you don't blindly spend money on eating lunch out every day or buying shoes, you can set up a prepaid card specifically for those budgets. You can decide how you want to spread those funds out and there's no risk of you overspending. This is also a good way to gauge how much you're spending each month on specific costs.
How to Make a Prepaid Card Free – or Almost Free
If a prepaid credit card is the solution you need, shop around for the best one. You can expect to pay fees, but you can find one that offers the lowest or fewest charges. Also, you want to make sure that reloading the card is convenient for you – whether that's through direct deposit or adding funds through a wire service. And there are a few things you can do to reduce the cost of a prepaid card to make it worth your money.
Many prepaid card companies will waive most of the common charges, such as the monthly service fee, if you load a certain dollar amount, or if you have your paycheck or other recurring income, such as Social Security or welfare payments, deposited directly to the card account. The key is to compare the fees you'll be charged and to choose the card that has the features you need with the fewest expenses and fees.
Read the Fine Print
Many prepaid cards offer free ATM withdrawals, but you're often restricted to one or two withdrawals per month. Take advantage of those freebies and pull out cash only as needed. You should keep track of your spending and know what your balance is by checking online. Avoid checking it by phone to skip the fee. Be sure you choose ATM machines that your card is approved to use with no extra cost; otherwise, you could pay two fees: one to your prepaid card company and one to a bank that isn't in your card's network. Ask the customer support representative what special purchase fees the card charges so you can avoid those too. Also ask whether a prepaid credit card is FDIC-insured, and you'll be able to use your card with confidence knowing your money is protected in case your card is lost or stolen.
Do your due diligence before settling on a prepaid credit card and you can effectively manage your money without spending your hard-earned cash on numerous fees. Shop online and ask for details on all of the fees you could incur with a prepaid card.