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Pros and Cons of Prepaid Cards


Pros and Cons of Prepaid Cards

For years, we’ve heard about the many benefits of prepaid debit cards. No credit check, safer way to spend your money and the ability to pay bills or shop online. Indeed, by 2013, this market is expected to surpass $650 billion, double the market size it currently is. Despite those benefits, there are a few other considerations to keep in mind as you decide whether or not you need a prepaid credit card. Here’s a hint: a celebrity endorsement does not a good prepaid card make.

Fees

No matter the financial product, there are going to be fees associated with the convenience and prepaid cards are no different. Still, it’s important to carefully review the terms and conditions associated with any credit offer, especially those associated with prepaid cards. There are often fee structures that can be confusing. Some offers have monthly maintenance fees, others have annual fees and still others even enforce a weekly fee. Do the math first – a $1.95 weekly fee might not seem like a lot, but it’s more than $100 a year (compared to traditional offers that sometimes have no annual fees at all).

The H&R Block Prepaid MasterCard has no weekly or annual fees, though it does have a $2.50 monthly fee if you don’t use it. That said, you can also enjoy savings when you purchase H&R Block software for use in preparing your taxes.

Celebrity Endorsements

As we’ve recently learned, a celebrity endorsement means little. The Kardashian prepaid offer serves as proof that celebrities can easily distance themselves to products they endorsed. Other celebrity endorsements include Rob Dyrdek, Russell Simmons and the Baby Phat branding offer. This doesn’t lessen the importance of checking the terms and conditions. Pay attention to those details. Rob Drydek might not blink at some of those fees, but most of us are on tight budgets and every little bit helps.

Credit Ratings

Contrary to popular belief, these prepaid offers play absolutely no role in your credit rating. If you’re looking to build or rebuild your credit history, you’re better off choosing a secured credit card. The difference lies in whose money you’re spending.

A prepaid card means you deposit the money and then spend it. You’re not spending anyone else’s money, so there’s no one to report your ability to repay. On the other hand, a secured card requires a matching deposit, but you’re spending the bank’s money. Therefore, the bank can report how well you handle its money. Your deposit is used only as collateral.

Theft

This is one area where prepaid cards might have a bit of an advantage over traditional credit cards. First, your prepaid card usually isn’t linked to your banking account, so any loss is limited to whatever is on your card should you lose it or it’s stolen. On the other hand, there may be no safeguards in place, depending on the terms of the prepaid card, for you to recover any lost money.

Ratios

If you’re only using your prepaid debit card for the occasional online purchase, the ratio of fees versus what you spend might be remarkably high. With the monthly fees, usage fees, maintenance fees and any number other deductions a prepaid card pulls, you could easily spend 20% or more of what you put on the card in paying for the convenience of using the card. Again, it goes back to double checking those fee structures before you sign up.

No Credit Checks

True, you don’t have to worry about an approval process, but the flip side of that is that you also don’t have the benefit of improving your credit. In many ways, it’s a double edged sword.

Of course, there are benefits of using these financial tools, but ultimately, you have to decide if those benefits outweigh the downside. If you’re choosing a prepaid card because you’re considered “unbankable”, it might be in your best interest to take that avenue and fix whatever’s preventing you from opening a bank account. If you’re looking to improve your credit scores, consider a secured credit card instead – you’ll get the same benefits of being able to shop online and other considerations, but you also have a better protection plan in place if your card is lost or stolen – plus you improve your credit scores.

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