With the cost of checking accounts and other bank accounts rising, more consumers may be eyeing prepaid cards as an alternative to traditional banking services.
Prepaid debit cards have numerous advantages. For one thing, they're easy to get; anyone can qualify, independent of credit scores or income. Further, unlike credit cards, you can spend only the money you have loaded on the card, so you don't have to worry about high credit card balances, interest charges or late payment fees. Prepaid cards co-branded with major card issuers like Visa and MasterCard are as universally accepted as credit cards, and you don't even need to have a bank account to load money onto prepaid cards.
That being said, prepaid cards come with numerous drawbacks. Most significantly, prepaid cards will not help you build up a credit history because, unlike your use of credit cards, your use of prepaid cards isn't reported to the credit bureaus. This can be a problem in a world where credit scores reign supreme.
“Many consumers looking to work their way back into credit think that prepaid cards can be a transitional card,” says Bruce McCleary, director of media relations at ClearPoint Credit Counseling Solutions. “However, this is the one thing prepaid cards do not do. If your aim is to rebuild credit, you need to look at other products, such as secured credit cards, which report credit usage habits to the credit rating agencies each month.”
There are other drawbacks to prepaid cards as well, says McCleary, the primary one being fees, fees, and more fees.
“It's not always easy to see the true cost of prepaid cards, because they come with so many fees,” McCleary says. “Consumers need to be very, very cautious about what they get into with prepaid cards, probably more so than with most other products in the world of banking.”
The good news is that you can avoid many of the drawbacks of prepaid cards by selecting the right card and using it in the right way. Here are six questions to ask before getting a prepaid card.
1. Is the card universally accepted?
Be sure to pick a card co-branded with major networks, such as Visa and MasterCard, which are universally accepted. American Express is increasingly getting into the prepaid card market as well, offering several low-cost options. However, if you are considering an Amex prepaid card, make sure it will be accepted in all the locations you would use it.
2. What are the fees?
Many prepaid cards come with a confusing array of fees: activation and set-up fees, monthly maintenance fees, transaction fees, fees for loading money onto the card, fees for ATM withdrawals, and more. The range of fees varies considerably from card to card, and you can save a boatload of money by doing your homework and reading up on them.
Some issuers are more forthcoming with their fees than others. If the details of the fees are difficult to find in a card's terms and conditions, it could be an indication that the fees are not as consumer-friendly as you'd like.
3. How easy is it to load money on the card, and what is the cost?
Make sure you pick a card that gives you an easy way to load money. Some cards have multiple physical locations where you can load money, or they allow you to transfer money online or via your bank. Most cards charge a fee each time you load money, so be sure to note the cost.
4. What are the customer service costs?
Many prepaid cards offer only emailed statements and charge extra for paper statements. If you are not a computer user, you need to weigh the extra cost and trouble against the card's benefits. Similarly, some cards offer free customer service calls, while others will charge you each time you speak to a customer service representative.
5. Which fees can be avoided and how?
Many prepaid cards will waive or lower the monthly fees if you set up a direct monthly deposit from a bank account. If that is a realistic option for you, there are great savings to be had by setting up automatic loading. However, watch out for cards that require a minimum monthly re-load. The typical minimum is $500, and if you won't be spending that much with your card each month, that card may not be your best option.
Similarly, some prepaid cards come with one free ATM withdrawal per month and charge between $3 to $6 per withdrawal after that (in addition to the fees charged by the ATM). For parents planning to use a prepaid card for their kids' monthly allowance, a prepaid card with high ATM fees may not be the best choice.
6. What will my “cost of use” be?
Ultimately, how much a prepaid card costs depends on how it is used. And this, of course, varies from consumer to consumer. Armed with the above information, you can now determine how much it will cost you to use a prepaid card.
First make a list of how you will be using the card, including how you plan to load money onto the card (and how frequently), whether you will be using it for ATM withdrawals, whether you will be requiring monthly paper statements, and so on.
Once you have your list, find three prepaid cards that look most promising and write down what their cost of use will be each month, based on how you plan to use the card. Be sure to include set-up charges, monthly maintenance fees and annual fees.
Once you total your personal cost of use, it will be easy to see which prepaid card offers the best value. Further, going through these steps will not only help you pick the best prepaid card, it will also educate you on how to get the most out of it.