Prepaid cards have become popular holiday gifts, but what do you really know about them? Here are some facts that you should keep in mind when giving or using a prepaid card:
Prepaid debit and prepaid credit cards are essentially the same thing. People refer interchangeably to “prepaid debit cards,” “prepaid credit cards,” and “prepaid cards.” All three terms describe the same kind of card: one that has money “loaded” to it before it is spent at a merchant. Common examples are prepaid Visa, MasterCard and American Express cards. Generally, the purchaser of the card “loads” the card with money at the time of purchase. There is typically a service fee of approximately $5 charged at that time as well. Additional money can be added to many prepaid cards to increase the amount available to spend.
Prepaid cards limit how much you can spend. With a prepaid card, you can only spend up to the amount loaded onto the card. For example, if you receive a $100 Visa gift card and don’t add any funds to it, you will only be able to buy $100 worth of goods and services with it. Although this feature can be inconvenient and even embarrassing if you are caught short-handed at a store, it can be a great tool for teaching budgeting skills or enforcing budget limits.
For example, if you budget $500 per month for groceries, you can load $500 onto a prepaid card at the start of the month, and then use the card to pay for your groceries. If the card is the only form of payment you take to the store, you’ll be forced to stick to your budget since you will have no other way to pay for your groceries.
For parents, a prepaid card can be an easy way to give a child an allowance and/or spending money. The child will have to keep track of the balance on the card, and will not be able to go over that amount.
It’s easy to get a prepaid card. Unlike credit or debit cards, which require you to establish your credit history, identity, and/or have a bank account, acquiring a prepaid card requires nothing more than going into a store and purchasing a card. If you pay cash, you won’t even need to show your identification.
Prepaid cards don’t require you to show ID. Prepaid cards are relatively anonymous, in the sense that you don’t need to provide any personal information to purchase or use them. Thus, you will never to be asked to show identification when you’re using a prepaid card. Conversely, should you lose a prepaid card, it can be used by whoever finds it. However, many prepaid card issuers will allow you to cancel a lost or stolen card and issue you a new card (though this often requires a fee).
Prepaid cards don’t affect your credit score. Given that you don’t need to provide any personal information to use a prepaid card, it’s not surprising that using them has no direct impact on your credit score. However, as discussed above, prepaid cards can help you stick to your budget – and sound money management can result in a higher credit score.
Prepaid cards don’t offer much protection. You probably know that your liability for unauthorized charges made using your credit or debit card is greatly limited (usually to the first $50, and often to nothing). But prepaid cards don’t offer the same protection. For example, hackers have accessed prepaid card accounts and drained the balances, so that cardholders suddenly discovered that there was no money left on their cards to spend. As discussed above, some prepaid card issuers will offer some protection for lost or stolen cards. However, there is no federal law mandating them to do so, or outlining a time frame in which they should remedy the situation. Therefore, most cardholders will find themselves at the mercy of the card issuer when it comes to getting their money back.