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Thinking about picking up a reloadable prepaid card? Join the club. In 2015, more than half of all Americans purchased a prepaid card for personal use, compared to 19 percent in 2008, according to Synergistics Research Corp., which studies the prepaid market.
There are more than a dozen types on the market now, and plenty of variations that can make them a wonderful or terrible choice. Here are the nine things you need to know about general purpose prepaid cards.
1. Prepaid cards are more like debit than credit. Prepaid cards look like credit cards and spend like credit cards but there’s no credit behind them. They are technically debit cards – when you use them, you’re spending your own money, not the bank’s.
Unlike traditional debit cards, however, you don’t need a bank account to use a prepaid card. You just load dollars directly onto the card and then use that balance for purchases. When the balance on the card dips too low, you reload more money.
Because prepaid cards are associated with major card networks – Visa, MasterCard, American Express and Discover – they can be used anywhere debit cards can: to buy groceries, gas up your car, even pay bills online. And because the fees merchants pay to accept debit cards (including prepaid debit cards) are lower than those for credit cards, there may be places that will accept your prepaid card, but not credit cards.
2. Prepaid cards are an alternative to banks. For the nearly 68 million people in the U.S. without a checking account, prepaid cards offer the ease of card-based purchases without the hassles of dealing with a bank. You can use prepaid cards to book a hotel room or rent a car. They even come with account and routing numbers, which means you can have your paycheck direct-deposited onto your card.
By March 2015, customers had loaded $7 billion onto the American Express prepaid cards, Serve and Bluebird. Forty percent of that came from directly depositing paychecks. Even more people use Green Dot, and Wal-Mart’s MoneyCard is the most popular of all, according to Synergistics.
3. No credit is required – or built. Prepaid cards were originally designed for people with poor or nonexistent credit history, and remain an excellent option for those with credit issues. It’s impossible to spend beyond your means with a prepaid card – the card expires when the preloaded dollars run out – which makes it a useful first card for teens or those recovering from debt.
It will not require a credit check, but neither will it help you build credit since spending on prepaid cards is not tracked by credit bureaus. A study by The Pew Charitable Trusts found that the most common reasons people cited for using prepaid cards were to make purchases in places that don’t accept cash, to avoid credit card debt, to control spending and to avoid overdraft fees.
4. Look for features that suit your needs. Some prepaid cards let you pay bills online, even setting up automatic monthly payments. Some will issue payments via electronic check issued by the card company or let you withdraw cash from an ATM using a special PIN.
You can manage your account online or, often, via mobile app. Green Dot, AmEx Bluebird and Serve, and Walmart MoneyCard all offer apps to manage your accounts on your mobile device. "Seventy percent of general prepaid card users use mobile to check balances and transaction history and receive text alerts," says Bill McCracken, CEO of Synergistics. "So mobile capability in a prepaid card is very important."
A reload card works like a gift card: It contains a code number that becomes linked to the amount of money you paid the cashier. Using reload cards with a PIN was a popular and convenient way to load a prepaid card online or over the phone – until PINs became a target for scammers. Green Dot phased out its MoneyPak PIN in 2014 and Vanilla discontinued its March 31, 2016. Now you have to swipe your MoneyPak or Vanilla cards at a store register.
6. Watch out for fees. You don’t pay interest on a prepaid card as you do with a credit card. Instead, you will find fees, and they often will be literally hidden. Unlike credit cards, which by law must disclose their terms and conditions upfront, no regulation forces pre-purchase disclosure of fees on prepaid cards. In 7 in 10 cards studied by CreditCards.com in 2016, prepaid card fees were not fully disclosed.
Prepaid cards charge fees for everything from setup to reloading. The good news is that by comparison shopping, consumers can limit fees, as long as you keep a minimum balance or sign up for direct deposit.
Wal-Mart, for example, waives its $5 monthly fee if you have your paycheck or government benefits directly deposited to the account, or if you have loaded at least $1,000 in the previous month. Most large banks have low-cost prepaid card options – U.S. Bank’s Contour prepaid card costs $4 a month and Chase Liquid costs $5 – and American Express prepaid cards are essentially free.
Some cards charge for special benefits such as overseas use or automated bill pay, and most tap you for out-of-network ATM withdrawals. Fee structures vary so it’s important to read the disclosures.
7. Shop around. "The prepaid industry has expanded in recent years and with increased competition, consumers have far more options," says a Consumer Financial Protection Bureau representative. These include prepaid cards with benefits aimed at specific lifestyles. Expect to see more incentives such as Wal-Mart’s cash-back rewards, which gives cardholders 3 percent cash back for using their MoneyCard at Walmart.com, 1 percent for using it in their stores.
8. Prepaid cards can help you manage your money. Even for people with a regular bank account, a prepaid card can be an effective budgeting tool. Load your monthly grocery budget onto a prepaid card and use it strictly at the supermarket; when the money’s gone, your spending stops automatically. "Many general-purpose reloadable prepaid cards are specifically designed to help consumers manage their spending while limiting costs and risks," said Richard Cordray, director of the CFPB, in a February 2016 speech.
9. You’re protected. "While prepaid cards were developed by entrepreneurs as an alternative to banking, the funds in these accounts are almost always held by a bank or credit union and enjoy federal deposit insurance," said Cordray. Even those not issued by a bank offer the zero liability protections of the payment network noted on the card, such as MasterCard or Visa. If you report the loss or theft of a registered card to the issuer, most will restore your original balance and issue a new card. In other words, a prepaid card works like a debit card, minus many of the risks and, of course, the bank account.