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Thinking about picking up a reloadable prepaid card? Here's what you should know first.
1. Prepaid cards are a hybrid breed. What looks like a credit card and acts like a credit card isn't always a credit card because although it's often called a prepaid credit card, and certainly looks like one, a reloadable prepaid card works more like a debit card. You choose the dollar amount to put on the card, and as you spend, your purchases are deducted from the total balance. When the balance gets low, you can reload with more money. Because prepaid cards are associated with one of the major card networks -- Visa, MasterCard, Discover, American Express -- they can be used anywhere those cards can, whether it's to buy groceries at the supermarket, score merchandise on eBay or even pay bills online.
2. Prepaid cards are an alternative to banks. For the 80 million people in America who prefer not to deal with banks, a prepaid card can make life easier. Without linking to a bank account, the card allows you to do things that require a credit card, like rent a car or book a hotel room. Cards even come with account and routing numbers, so you can have your paycheck direct-deposited onto your card -- no more need to deal with check-cashing businesses. "A reloadable prepaid card is a true alternative solution to a traditional bank account," says Chris Britt, chief production officer of Green Dot, a company that produces reloadable prepaid cards.
3. Prepaid cards are available to those with poor or no credit. If your credit history is tissue-thin or nonexistent, or if your credit score is so low a regular credit card issuer doesn't want to bank on you, a prepaid card may be just the ticket, since there's generally no credit check to qualify. Since you can't spend beyond the loaded value, prepaid cards can also be a good first card for teens, who can learn to use a card judiciously without the temptation of a spending spree. It won't help you build credit, since your prepaid card activities aren't tracked by credit bureaus, but it can also keep you from making that big mistake with a credit card that can harm your credit for a long time.
4. Watch for different features. Besides the basic ability to make purchases with a card, prepaid cards offer a spate of other features. Most allow you to withdraw cash from an ATM; you'll be sent a PIN number for that purpose. Other cards let you pay bills online, authorizing payment to creditors, to whom your card company issues either a paper or electronic check. It's even possible to set up recurring payments for monthly bills.
5. Reloading is simple. Need to put more cash on your card? You have four options: transfer money from a bank account or financial institution; have your employer direct-deposit your paycheck onto your card; transfer money from a PayPal account; or reload in a retail store like Wal-Mart or Walgreens. With a Green Dot card, you use cash to buy a MoneyPak -- in essence, a packet with a code number that becomes linked to the amount of money you paid the cashier. Later, you access your reloadable prepaid card account either online or by phone, punch in your account number and the MoneyPak number, and Green Dot will apply the total to your card.
6. Expect to be hit with fees. Most credit card issuers make money on the interest you pay on your debt. With reloadable prepaid cards, the profit's in the fees, and some cards carry a lot of them. You can be hit with fees when you purchase the card (it's billed as a one-time "setup fee"), add more cash to your balance (with a MoneyPak, for instance), withdraw money from an ATM or even check your balance online. Plus, many cards charge a monthly maintenance fee whether you're actively using the card or not. "Unbeknownst to you, once you buy, the card maintenance fees eat away at your balance," says Bill McCracken, CEO of Synergistics Research Corporation in Atlanta, who studies the prepaid card market. "You think, 'I'll keep this card for when I need it,' and by the time you get around to it, there's nothing left.'"
7. Not all cards are created equal. Though fees are more the norm than the exception, every prepaid card has a different fee structure. A few offer fee-free transactions. Others waive fees when you carry a high-enough balance on your card, direct-deposit a paycheck, or cash checks at the retailer that sells the card. In some cases, state legislatures have stepped in to limit prepaid card fees; in others, retailers have reduced fees to make cards more appealing to consumers. Fee details are printed on the card packaging or on the card itself, so "the bottom line for consumers is, if you're purchasing a prepaid card for any reason -- as a gift, for phone calls, for daily living expenses -- turn it over and read the fine print about monthly maintenance fees and inactivity fees," says McCracken. "There are good deals out there, but you've got to have your eyes wide open."
8. Prepaid cards can help you manage your money. Even with a stack of fees attached to your prepaid card, if you don't have access to a bank account, "it's much more expensive to manage your finances by not using prepaid cards," says Jennifer Tramontana, director of communications for the New Jersey-based Network Branded Prepaid Card Association. "If you're an underbanked person and you have to pay your phone bill, you have to pay for a money order, then pay to send it out. For some people, the cards are truly a cost savings." Even for those with a regular bank account, a prepaid card can be a clever 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.
9. You're protected. Prepaid cards offer some of the same theft and loss protections as a credit card. 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. You also have some of the same protections offered by a bank, in that the amount on your card is FDIC-insured up to $250,000. That makes a debit card that acts like a credit card a fairly safe bet.