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The number and types of prepaid credit cards have multiplied like mushrooms over the last couple of years. Whether you’re looking for a gift for the person who has everything, an easy way to transfer funds to a student off at college, or simply want the convenience of a credit card without the danger of overspending, there’s now a prepaid card to fit your every need.
Like with credit cards, prepaid cards come in a variety of flavors, so compare options and be aware of the differences before settling on a choice. Here are the three main types of prepaid credit cards along with an explanation of their benefits and limitations:
Prepaid Credit Cards:
Reloadable Prepaid cards function almost like debit cards—minus the bank account. In other words, while the cardholder can regularly load funds on the card, there are no overdraft options or potential fees. Reloadable cards can be purchased at local banks or even grocery stores and, generally speaking, can be used wherever merchants accept credit cards.
Pros: Reloadable cards, in addition to being widely accepted, don’t require credit checks; some also allow cardholders to build their credit history. For parents of tweens, some cards allow purchase monitoring or even spending limits in certain categories. With Discover’s Current card, for example, parents can even sign up for texts or e-mails whenever their child makes a purchase. On occasion, some reloadable cards also come with a $0 liability in the case of theft or loss.
Cons: Cost. Most reloadable prepaid cards charge a confusing series of fees, enough to make your head spin. Most charge monthly fees, ranging from $1.99 to $9.95 a month (equivalent to a $24 to $120 annual fee), and many charge reloading fees, printed statement fees, as well as other premiums for ATM withdrawals, etc.
When considering a reloadable card, studying the options and fee structures can save you a bundle. The field of prepaid credit cards is becoming more competitive, so fees are coming down. Some prepaid credit cards, such as the Upside Visa Prepaid Card or the Mango Prepaid MasterCard, charge as little as $1.99, and they will waive the monthly fee altogether if you deposit a certain minimum amount every month, ranging from $300-500.
The bottom line: Reloadable prepaid cards provide restricted funds to cardholders, and some allow parents the option of monitoring their child’s spending. However, many reloadable prepaid cards come with extra fees and limitations.
Non-reloadable Gift Cards:
These prepaid cards are the non-reloadable option, ideal for a one-time fund transfers or for gifts, which offer the receiver maximum flexibility. Some gift cards, such as those issued by credit companies like Discover and American Express, are all-purpose: they can be used anywhere. Other types of gift cards are issued by retailers, such as Best Buy, Home Depot, or Barnes & Nobles, or by entertainment outlets and restaurants. These, generally speaking, can only be used to buy goods or services at the merchant with which they are associated.
Pros: All-purpose gift cards are often accepted anywhere their issuer’s brand is. They aren’t linked to any bank or credit accounts, and the cardholder can’t charge more than the available balance on the card. Merchant-specific cards make great gifts too, if you know the receiver likes to shop at the store in question.
Cons: While all-purpose gift cards offer the most flexibility of use, they are also more likely to come with a one-time purchase fee. In addition to a purchase fee, some gift cards charge other transaction fees, including inactivity fees after a certain period of time has passed. Gift cards can’t be used at ATMs, and some merchants may not take gift cards. Users can also expect lag times for refunds or cancelled purchases.
The bottom line: Non-reloadable gift cards are great for gifts or as a credit option for those who don’t expect to have to make future plastic transactions. However, these cards can’t be used at ATMs, and they may come with associated fees.
Secured Credit Cards:
Secured cards function like regular credit cards, but with the added cushion of a cash deposit behind them. With a secured card, consumers can access a credit line based on the amount of cash o deposit with the card issuer. For students or those with little or a poor credit history, secured credit cards are usually easier to acquire than regular credit cards.
Pros: Secured cards allow their holders a way to build or rebuild a credit record. Once you establish a relationship with the card issuer, secured credit cards and can often be converted into non-secured versions down the road. Secured credit cards offer all the buyer protections or traditional credit cards and the protection of cash-backing.
Cons: Cardholders will have to fork over a deposit to back the card’s available credit. If this balance is low, the card may not prove useful in an emergency. In addition, APRs are usually higher for secured cards. Furthermore, any late payments will count against the cardholder, building a poor credit history.
The bottom line: Secured cards offer consumers a way to build a credit history with the added protection of cash backing. These cards come with both the benefits and dangers of traditional credit cards, and often have higher APR’s than their non-secured cousins.
