There are a lot of card options out there when it comes to managing your personal finances.
In this article we will explore prepaid cards, how they function, and what to consider when using one if you can’t avoid it.
In reality, these prepaid cards should not be anyone’s first option. Fees on prepaid cards can be excessively high, they limit your ability to build credit, and they can be inconvenient when it comes to paying bills. With all of this said, if your credit rating is low you may need to start with a prepaid or secured card before using a more conventional credit card.
Before we get started, let’s cover the basics.
There are four major types of cards which you should be familiar with: credit cards, debit cards, secured cards and prepaid cards. To better understand how a prepaid card works, let’s briefly cover how credit, debit, and secured cards work.
A credit card is a type of card which allows you to make purchases or pay bills on credit. Credit card companies will typically charge an annual fee, in addition to a percentage of your balance, as a cost of loaning you this money. The card company will expect you to pay back the card balance on a monthly basis and will charge interest if the monthly statement is not paid in full. Credit cards are typically available to individuals with fair to excellent credit, and it can be challenging to get a credit card if you have poor or bad credit.
This type of card is connected directly to your bank account. As you make purchases, the purchase amount is deducted from your bank account balance. Some cards provide “overdraft protection” which will allow you to make purchases even when your bank account is at zero. Banks can charge hefty fees for this overdraft protection, so it can be very costly to make purchases on a debit card when there are no funds in your checking account. A debit card functions, in many ways, like an electronic check.
For a prepaid card, you are required to preload funds onto the card before making any purchases. Once the available funds are used up, the prepaid card will no longer work to make purchases. This is the “safest” type of card from the bank’s perspective, as you can’t spend money which has not already been “loaded” onto the card. If you have poor credit, you may be required to use a prepaid card until your credit score improves.
With all of this being said, it is important to keep in mind that using a prepaid card is an important first step for many people looking to establish or rebuild their credit score. Read our previous articles on improving your credit score to understand exactly how this process can work.
While a prepaid card provides peace of mind from a budget perspective, there are very few consumer protections associated with these cards. If the card is lost, stolen, or unauthorized purchases occur, there is little you can do to recover the money. The Consumer Financial Protection Bureau (CFPB) issued a ruling that these consumer protections must be improved – but the rule does not begin until October 1st 2017. In the meantime, treat a prepaid card like cash. If it’s lost or stolen – the money is gone, and there is little you can do about it.
A secured credit card is very similar to a prepaid credit card, but there is one important difference to consider. With a secured card, you put up a certain amount of money as collateral. Let’s call it $500. The card issuer will allow you to make charges on the card up to, but not beyond, the $500 spending limit. At the end of each month, you are required to pay down any balance held on the secured card. In the event you do not pay your balance, the card issuer can take your $500 deposit to recover the loss. You can think about a prepaid card and a secured card in much the same way.
While it may sound like there are mostly drawbacks to prepaid and secured cards when compared to credit or debit cards, there are certain situations which are most suited for using a prepaid card.
Prepaid Cards – When They Make Sense
Here are six reasons why a prepaid card may be the right fit. Again, prepaid cards should be used as an option of last resort if a bank will not issue you a standard credit or debit card.
One of the biggest risks in having a credit card is the ability to spend money which can’t readily be paid back. In the United States, the average household has $16,061 in credit card debt. For most Americans, this means months or years of making payments. Every month that the credit card balance goes unpaid, the credit card issuer is charging interest against the balance.
A prepaid card is a very simple way to help you stick to a budget and only make purchases you can afford to pay back.
Regarding security – it is true that prepaid cards have less general protections than credit or debit cards. A major benefit, however, is the fact that if someone steals your prepaid card, they will only able to spend the money which is already loaded onto the card. If your credit or debit card is stolen, there is the possibility that the perpetrator can spend the entire balance of your bank account or use your credit card until the credit limit is reached.
For this reason, many Latinos prefer to use prepaid cards when making purchases online or with vendors over the phone. The idea here is that the fewer people that have your personal banking information, the better. Again, if a prepaid card is compromised you are only risking the current balance of the card.
3.Electronic Payment for Individual without a Bank Account
Currently, 51.1% of Latinos do not utilize a checking account. If you are one of these individuals and don’t like carrying cash, a prepaid card can be a great option. This card will allow you to make purchases online or utilize electronic bill paying services from phone, internet or utility providers.
4.Building Better Spending Habits
This is very similar to the first item on this list but should be thought about a bit differently. By using a prepaid card, you are, in many ways, forced to create a monthly household budget. This is one financial planning item that the majority of American could use help with. If using a prepaid card helps you establish a monthly budget or spend your money more efficiently, you will find yourself ahead of the game.
Don’t know what to get someone for a birthday or Christmas? Consider a prepaid card. This is a better option than a gift certificate, as the person receiving the card can use the money anywhere they see fit. This approach is a bit more classy than just giving cash as a gift, and the person will appreciate the gift even more when they make their purchase using the card.
Many companies are moving towards prepaid cards as a mean to conduct payroll. This eliminates paper waste from writing checks and typically reduces the time until the funds are available. If you are a business owner, this can be a great way to pay your employees more rapidly and reduce the clutter associated with bi-weekly payroll processing.
How to Choose, and Use, a Prepaid Card
Historically, prepaid cards have developed a reputation for providing consumers with less-than-optimal service. Many of these cards were known for high monthly fees, unclear terms and conditions, and subpar customer support. In recent years, things have begun to improve. With this said, it is still critical to read the fine print and understand every fee and limitation covering a new prepaid card.
American Express, Kaiku, and PayPal all offer highly competitive rates and provide a simple fund loading process. For Latinos, the Univision MasterCard and Coopera Prepaid Reloadable Visa card are both popular options.
This card is unique, in that replacement of money is available if your card is lost or stolen. At a monthly maintenance fee of $9.95, there are more affordable options when it comes to this out of pocket expense associated with prepaid cards. With this said, the card offers a network of in-network ATMS for no-fee cash withdrawals and offers no fees for depositing funds from paychecks, government benefits or tax refunds. Lastly, the card provides 24/7 bilingual customer service at no additional cost.
The Coopera prepaid card is a good alternative, as this card has partnered with a number of credit unions throughout the Southwest United States. This relationship allows for easy in-person deposits by allowing customers to work with a bank teller when loading funds. While the card only charges a $5.95 per month maintenance fee, which is waived with a card load of $300 or more, the card makes up for this lower monthly fee in other areas. Phone support is $1.00 per call for automated assistance and $1.50 per call for operator assistance. An additional card associated with the account will cost $10 per card.
These are just two options to consider, and the information above is just an overview of the card features and fees. With any major financial decision, it is important to read the fine print and develop a firm understanding of every fee, limitation and service charge which will apply.
Take the time to shop around your local market to determine exactly which cards are best for you, your family and your financial situation. Word of mouth can be a powerful way to understand which companies to partner with and which companies to avoid.
If you have to use a prepaid card, taking these steps will help ensure you find the right card for you and your family.