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Prepaid Cards: A Smart Alternative to Credit Cards

A smart alternative to credit cards is a prepaid debit card with the VISA, MasterCard, American Express, or Discover logo. There are two types: Stored value debit cards that can be reloaded, and giftcards, which expire when the initial purchase value has been spent. These cards allow you to enjoy all the benefits of credit cards, without the typical drawbacks.

Superior Value

Because you can't overspend, you'll find that a prepaid card is a great tool for those who have needed debt help to control your spending and better budget your money. In addition to avoiding debt, you'll discover that a prepaid card can also save you money. Because you have not borrowed money, there are no monthly payments on a loan, no finance charges, or late fees. And you will really save money if you're currently paying high fees for money orders or check cashing services. However, there are other fees – monthly usage fees and reload charges; fees for taking an ATM withdrawal; even fees for checking your balance.

Prepaid Debit Cards

Stored value debit cards are prepaid cards that you can replenish. And since you can set up automatic deposits to the card, it's also an easy way to establish an emergency fund. Best of all, it allows you to enjoy the safety and convenience of credit cards, without accumulating more debt or jeopardizing a debt relief program.

Easy Loading of Funds – You can add funds to a prepaid debit card from your checking or savings account or you can direct deposit your paycheck or government benefits check onto the card. And as an added convenience, you can set up your card for automatic reloads. That way, your card will automatically be replenished with funds on a regularly scheduled basis.

Easy Paycheck – Some employers offer their workers the option of receiving their paychecks via stored value debit cards. Instead of a paycheck, you have a paycard, and your salary is electronically deposited to the card on payday. This is very useful for people who do not have a bank account, and allows them to save the fees charged by check cashing agencies. See the American Payroll Association's Paycard Portal website for more information.

Prepaid Gift Cards

Prepaid giftcards are less expensive to initially acquire, because there is no processing fee, only a small premium (usually less than $5.00) at the time of purchase. But there are hidden fees which vary widely from card to card. For more information, see the Montgomery County, Maryland, Office of Consumer Protection report Giftcards 2006. For an example of giftcard fees, see the Compass VISA prepaid giftcard terms.

Convenient Management Tools

To help you better manage your money, some of the reloadable prepaid cards send you a detailed monthly statement. And almost all of the prepaid cards offer online account management tools, where you can track your spending and transaction history at any time via the Internet.

Things Prepaid Cards Can't Do

As wonderful as prepaid cards are for budgeting and keeping your spending within limits, they cannot be used to improve your credit rating. Most issuers of reloadable prepaid cards do not report to the major credit bureaus.

Some things cannot be bought with a prepaid card. You cannot use a prepaid card to pay for subscription services (i.e., recurring monthly bills such as cell phone service or gym club membership), for gambling in casinos, and for travel on cruise lines and some international airlines. To rent a car, you must use a regular credit card or debit card before picking up the vehicle. You may use a prepaid card to pay for the auto rental when you return it.

You might not be able to use a prepaid debit card when a preauthorization hold is placed on the card, such as when you are buying gasoline at the pump. It all depends on how much is left on your card, and how much the vendor is reserving for the purchase. For an explanation, see the Mouseprint.org article Wells Fargo Gift Cards: The Perfect Gift?

Prepaid cards do not have the same protections as some credit cards. For example, you cannot request a stop payment on a purchase made with a prepaid card. Also, watch out for fraud. The same techniques used to make unauthorized charges on your credit card can be used on stored value cards. See the article Someone's Been Using My Gift Card.

For more information about these cards, visit the websites for VISA, MasterCard, American Express, or Discover prepaid cards. Check with your bank or credit union: most offer prepaid cards. Always read the fine print on the card's disclosure agreement. Prepaid cards can save you money, but you must shop carefully. Most have fees connected with accessing and replenishing your funds. For an example, see the cardholder agreement for the Mastercard Wow! prepaid card.

Take control of your finances and debt. Use our calculators and budget planner to help you manage your money.



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