One type of credit card being used more widely now than ever before is the prepaid credit card. A Prepaid spending card is basically a charge card that can be loaded with funds, spent just about anywhere that credit or debit cards are accepted, and then reloaded with additional funds. These cards used to be rare, sometimes sent instead of cash or a check for mail-in rebates, but they can now be purchased at major retailers like Wal-Mart. H&R Block is even willing to put your tax refund on a prepaid card!
In 2006, about $1 billion was spent using prepaid cards. This year, that amount is expected to be closer to $8 billion, almost double the $4 billion spent in 2008. Here are some of the pros and cons:
– Spending Ability Is Limited: Some people are using these cards as a way to make sure they’re keeping their spending within reason. If credit card spending is a problem for you or if you have a hard time keeping track of what’s in your bank account, a prepaid card will only let you spend until you run out of money. Some people are using these cards for specific items like restaurant food or vacation spending money. If you load a card at the beginning of the month with the amount you’re willing to budget for eating at restaurants, for example, the card will help you to stay within your budget guidelines.
– They Make Great Gifts: With the holidays just a few months away, people are starting to think about giving gifts this year. A prepaid card is can be thought of as a tacky gift, but it’s as good as cash and gives the person receiving the gift the option to spend the money anywhere. The popularity of gift certificates as gifts has grown dramatically over the past several years and a prepaid card makes a great alternative to a gift certificate.
– Fees: Like any financial tool, the fees associated with prepaid cards are important to consider. One knock against prepaid cards is that the fees can be hidden so easily. With many cards, you’ll pay an activation fee and a fee each time to add money to the card. Many cards also add a monthly fee, a fee to withdraw cash from an ATM machine, and a fee if the funds are denied because of an insufficient balance. You may also see fees for inactivity and for closing out a card.
– Fraud Potential: If your debit or credit card is stolen, there are measures in place to protect you against fraud. Prepaid cards, for the most part, don’t offer the same protection. If your wallet is stolen or your card is lost, anyone could theoretically pick up that card and use it. Because many of these cards are issued without the security of a PIN number, you don’t have the added level of protection that you do with a debit card. With many of these cards being used by customers that are anonymous to the credit card companies, it’s hard to back any fraud-related promises.