5 Things You Should Know About Prepaid Cards

Right now, there probably are three different types of plastic in your wallet or purse. Each type has different rules, disclosures, government regulations, and fees. So, wise consumers use the best type of plastic instead of cash.

Most consumers are familiar with credit cards and debit cards -- the first two types of plastic. Credit cards include an interest rate applied to all purchases, plus a variety of fees (e.g., overdraft, annual usage). Debit cards are offered by banks to their account-holders to access money in their checking and savings accounts.

Prepaid cards often look like debit cards but have several important differences. Prepaid cards must have value stored or "loaded" onto them before they can be used. Usually, consumers use cash to add value to a prepaid card. Then, the consumer uses the prepaid card for purchases, which are deducted from the balance on the card until there is no value left on the prepaid card. Then, more value must be added to the card before it can be used again.

Retail stores, restaurants and malls offer prepaid cards, usually called gift cards. Chances are you may have already received a prepaid card as a gift. I've received and given several prepaid cards as gifts. Customers use the Dunkin' Donuts prepaid card are the chain's retail stores. Prepaid cards from The Old Spaghetti Factory, Starbucks, and Target all operate similarly. Some retailers use their prepaid cards to track customers' purchases for rewards for loyalty programs.

Besides retail stores, many other companies and entities offer prepaid cards. Some employers pay their employees via prepaid cards, often called payroll cards. These payroll cards are designed for employees who don't have checking and savings accounts. Behind every payroll card is a bank that handles the transactions.

Some employers offer their employees prepaid cards only for qualified healthcare spending purchases. Some golf clubs offer prepaid cards for their members to use at the club's golf store and restaurant.

Some banks offer prepaid cards, too, for consumers who lack checking and savings accounts. With all of these prepaid cards in use, it is important for consumers to to know the advantages and disadvantages. There is a pretty good CNN Money article that discusses what consumers should know about prepaid cards:

"Watch out for the fees: The average prepaid card charges nearly $300 in basic fees a year, such as monthly charges, ATM fees and reloading fees, a recent NerdWallet study found... many prepaid cards also charge activation fees, transaction fees, bill payment fees, declined transaction fees, inactivity fees, customer service fees and paper statement fees."

"They don't build credit: Using a prepaid card doesn't help you build credit with the three major credit bureaus... don't be fooled into thinking they are doing anything to boost your credit score."

To browse the entire list of five tips, read the CNN Money article. To learn more about the differences between the three types of plastic in your wallet/purse, read the FDIC alert about consumers' rights. You can also select Prepaid Cards in the tag cloud in the near right column.

What has been your experience? What prepaid cards have you used?

Comments

[Maureen]

Like anything else, you have to read the fine print.

A lot of store gift cards lose value every month, and people don't realize it. I had a card which was a small refund to a store (something like $29) from 8-10 years ago, but I didn't remember I had it until almost a year later. By that time, the card had lost value to the tune of $5 a month - completely value-less at that point!

Some only lose $1 a month. Or they go by a fixed percentage drop, something like 5% of the total of the card, etc.

My regular bank (Citizen's) offers a secured credit card, similar in concept to prepaid cards, but the money is just there, secured to pay the card off if the owner doesn't "pay" for the credit on time, my daughter had one as her first credit card. They charged her an annual fee of $25, plus the money on the account actually earned interest if she wasn't using it. She had $500 secured - it was a good thing for her, the money was there, not "virtual", and I think it helped teach her to manage credit.

Not like when my niece had her first bank card and when the bill came, she said (in all earnestness), "You mean now I have to PAY for all of this?"

Macy's is nice because their gift cards not only do not EVER lose value, they can be added to without consequence. I wouldn't EVER get a "mall" prepaid card, I have heard nothing good about them from anyone!

[Nancy]

A lot of store gift cards lose value every month, and people don't realize it. I had a card which was a small refund to a store (something like $29) from 8-10 years ago, but I didn't remember I had it until almost a year later. By that time, the card had lost value to the tune of $5 a month - completely value-less at that point!

[3ScoreComparison.com]

The firm even applies mathematical models to data about your business to develop a commercial credit score for it.