Prepaid cards have gotten a bad rap, mostly because of the high (and often obscure) fees many of them charge.
Many consumers will recall high-profile stories about the pitfalls of prepaid cards, such as the Kardashian sisters’ prepaid ‘kard,’ which was met with such a media uproar because of its fee structure that it was pulled from the market after a few short months.
Nonetheless, prepaid cards are one of the fastest growing segments of the financial services industry. And not all of them are riddled with hidden fees, tricks and traps. Most recently, Wal-Mart and American Express teamed up to launch the Bluebird prepaid card, which is nearly fee-free except for a $2 fee for ATM cash withdrawals (there’s also a $2 fee if you opt to load money from a debit card). Terms of the Bluebird card are similar to those of the American Express Prepaid card, which also is fee-free except for a $2 fee for ATM withdrawals.
So, assuming you can get a user-friendly prepaid card, are they a good choice in certain situations?
“It’s like everything: If you know how to use the product it can be useful,” says Chad Gentry, executive director of mpowered, a credit counseling service in Colorado. “Prepaid cards can be great tools. But there can be a lot of fees associated with these cards, so it’s important to know what you’re getting into.”
Gentry outlines four main scenarios in which prepaid cards can come in handy.
1. When you need an easy budgeting tool: Wonder how much money you spend on groceries each month, but don’t have the time to track and total receipts? Prepaid cards can be an easy way to keep tabs on spending. Simply load your budgeted amount on a prepaid card and use it for the dedicated purchase category.
“It’s the same as using envelopes for budgeting,” Gentry says. “You can have one card for groceries, one for gas and so on. It’s a great tool for spending control. It stops automatically when there is no money left. There are no overdraft fees or large credit card charges at the end of the month to worry about.”
If you’re concerned about impulse spending during the upcoming holiday season, Gentry recommends putting your holiday shopping money on a prepaid card. It makes holiday spending decisions easy: If you don’t have more money to load on the card, you don’t have any money left to spend.
2. When you want to pay your kids an allowance: Worried about having your kids walking around with their spending money in cash? Want to be able to take a sneak peak at exactly how your child or young adult spends his allowance? Prepaid cards can offer a way to do both.
“We particularly see many families with younger teens using prepaid cards,” Gentry says. “We joke that it’s a credit card with training wheels. Families can use it even for younger kids’ allowance, but particularly for parents with college kids, it can be a way to set a controlled amount of spending money.”
Prepaid cards come with online access to track spending, giving parents an easy way to track purchases.
3. When you’re concerned about identity theft: While fraudulent charges are covered by issuers, falling victim to credit card fraud is both stressful and time-consuming. If you’re worried about online security, prepaid debit cards can give you all the purchase freedom that credit cards can, while minimizing risks of financial loss or identity theft.
Although thieves may be able to steal money from the prepaid card if they get ahold of your PIN, they’ll be able to spend only the money on that card, and your credit rating won’t be affected. If thieves get ahold of your credit card information, however, they can rack up thousands of dollars in debt in your name — debts that could ruin your credit standing if you fail to notice and report them in a timely manner.
4. When your credit isn’t exactly perfect: In the wake of the 2008 financial crisis, millions of Americans saw their credit scores tank, as they had to walk away from mortgage loans or fell into other kinds of financial hardship.
For those with poor credit who don’t qualify for a credit card, prepaid cards offer a way to get the payment convenience of plastic. Unlike with secured credit cards, you don’t have to put money into an account to secure a credit line: You simply load onto the card what you spend. There’s one considerable disadvantage, however: Prepaid cards won’t help build your credit score. If that is a concern, you are better off applying for a secured credit card.