For people shopping for prepaid cards, it is important to know that even though their names may be the same, they usually come with different features. Another thing you may need to know is that prepaid cards are quite different from debit cards and credit cards. Therefore, in this article, I will like to point out the following:
- What is prepaid card?
- Difference between prepaid cards and debit cards
- Difference between prepaid cards and credit cards
- How to shop for prepaid cards
- Advantages of prepaid cards
- Disadvantages of prepaid cards
What is prepaid card?
Prepaid cards are means of payment in plastic forms. It allows you to load certain amount into the card for your spending. Prepaid cards are reloadable cards with cash value. They are different from non-reloadable cards with cash value. A good example of non-reloadable card with cash value is gift cards. In the case of non-reloadable card, you cannot reload the card once you have exhausted the initial cash loaded in the card. This means that if you need to use it again, you need to get another new one. But for prepaid cards, you can reload it up to the maximum amount of the cash value of the card. You don’t need to have checking account before you can be issued a prepaid card. Prepaid cards do not require credit rating nor must you earn a particular level of income before you can get one.
Difference between prepaid cards and debit cards
I believe you now understand what prepaid card is all about. The question you may ask is what is the difference between prepaid cards and debit cards? The main difference is that, you need a checking account before you can be issued a debit card. And the card will be linked to your checking account. Any time you use your debit card to make payments, you are actually spending from your checking account that you maintain with your bank. Since you don’t have any checking account for prepaid cards, they are not linked to any account. You will be spending the amount you loaded into the card. Once you exhaust the amount, you can reload it again. Some banks may allow you to overdraw your account with a debit card. However, the bank will charge you for overdraft fee. The similarity between the two cards is that, you are spending your money, except when you are allowed to overdraw your checking account.
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Difference between prepaid cards and credit cards
If you are looking at the prepaid cards and credit cards, physically they look the same. It may be difficult to distinguish between the two cards by their outlooks. They both bear Visa or Smartcard logo. For credit cards, your credit rating is very crucial. Your bank or card issuer will like to conduct a credit check about you before your application for credit card can be approved. If your credit score is low, you may not be issued a credit card. Also, credit cards come in different types with different features. There are regular credit cards, rewards credit cards, travel credit cards, transfer credit cards etc. Each card has its own target markets. Your credit score will largely determine whether you will be considered for a particular type of credit card. In the case of credit cards, you are not spending your money. Your bank is indirectly lending you money to a particular credit limit with the hope that you will repay based on the agreed terms. Therefore, each time you use your credit card to make a payment, you are actually borrowing money from the bank or card issuer. You are expected to use your card responsibly by paying your card balance on time and ensure you don’t have any default. With credit cards, your transactions are reported to the credit bureaus. This means you can use your credit card to build your credit. In the same way, late payments and missed payments will hurt your credit score. But for prepaid cards, your transactions are not reported to credit bureaus. Therefore, you can’t use prepaid cards to build credit. Nevertheless, for people who find it difficult to open checking account or you have a bad credit which makes it impossible for you to get a credit card, you can still apply for prepaid card as it provides the convenience that credit cards offer. However, if your objective is to build or rebuild your credit, instead of applying for a prepaid card, you may need to apply for secured credit card. Secured credit card is a hybrid of prepaid cards and credit cards. For you to be issued a secured credit card, you will need to make a payment as deposit just as in the case of prepaid cards. The deposit will serve as collateral in case you default in paying your card balance. In most cases, your card limit will equal to the deposit you make. That means that you will not be able to spend beyond the amount of deposit you make. However, because the card is a credit card, you will be able to use it to build or rebuild your credit. Your card issuer will report your transactions to credit reporting agencies.
How to shop for prepaid cards
When you are shopping for prepaid cards, there are features you may need to consider. Of course, prepaid cards are the same but they have some distinguishing features. These distinguishing features lie on how the banks or the card issuers intend to make their money from the card. It is left for you to know which features you think will suit you and how you intend to use the card. You need to consider the following before you decide on which prepaid card to sign up with.
Fee: Some people sign up for prepaid cards before they understand what they are into when the bank starts bombarding them with different fees. Unfortunately, some banks will not display their fees for customers to compare. Nevertheless, that should not stop you from asking them the fees you may likely pay on the card. Find below the list of fees banks may charge you if you purchase their prepaid cards. While it is understood that no bank will charge all the fees, the list will give you a clue of what fees you may be asked to pay. Your best prepaid card will be the one that charges you less fee.
- Card activation fee: Having applied for and loaded your prepaid card with cash; that does not mean that you can start using it immediately. You still need to activate it. Some banks will charge you fee for the activation of the card. Some bank will not charge you anything for the activation.
- Monthly maintenance fee: This is a form of recurring income to the bank. Some banks will charge you monthly maintenance fee while others may not.
- ATM withdrawal fee: Your prepaid card is actually money held in plastic. It makes shopping convenient for you as you don’t need to carry cash all around. But there are situations when you will need cash. Market women may not accept card payment from you. In this instance, you will need cash. That means you need to use the card to withdraw cash from the ATM. The fee charged for using your card to withdraw from ATM is called ATM withdrawal fee.
- Inactivity fee: If you don’t use your card for a long time, it becomes inactive. The length of time your card enters inactivity is determined by your bank. When your card enters inactivity, you may be charged inactivity fee.
- ATM Balance inquiry: At times, you may not actually know the balance that is left in your card especially if you don’t keep track of your spending. In order to avoid embarrassment, you may want to check your balance before heading to a store or supermarket so that you don’t pick more than you can pay for. Some banks will charge you for ATM balance inquiry. Some may not charge you while some will allow you to make a certain number of ATM balance inquiry in a month. Any further inquiry you make thereafter will attract fee.
- Foreign currency fee: If you are an overseas traveller, there is tendency that you may likely use your card outside the shore of your country. When you use your card, you may be making purchase for items sold in the currency different from your home currency. This means that there is need for conversion. This usually attracts cost. Some banks will pass the costs to their customers while some may bear it themselves.
- Customer Service: One would expect that placing a call to the customer service of your card provider should be free. Nothing can be farther from the truth than this assumption as far as prepaid cards are concerned. Though not all banks will charge you for attending to your needs each time their customer service offers telephone support to you. It is better for you to make inquiry about this before you decide on bank to choose.
So, you need to consider the fees that you will be comfortable with. Some fees may look small to you but by the time you add them up, they can become so significant at the end of the year. There are many banks that are offering prepaid cards. Therefore you don’t need to pay through your nose to get one. You only need to make some comparison before you make your choice.
Network of ATMs: You need to find out the number of networks of ATMs that accept the card you want to choose. If the card does not have a wide coverage of network of ATMs, you may get stranded when you need to withdraw cash and discover that it is not possible.
Deposits: How easy is it for you to make deposit into your card? Remember that prepaid cards are reloadable with cash value. Do you need to walk down to your bank each time you want to reload the card? That will be strenuous and inconvenient for you in some cases. Some prepaid cards allow customers to make deposits in stores and range of retailers. This makes things convenient indeed.
Online or mobile devices payment: In this era of advanced technology, you don’t need to leave your home before you pay your bills. If you can’t make online payment or payment through your mobile devices with your prepaid card, it may not worth it. You should make enquiry if such payments will attract any charges.
Ability to create sub accounts and set limits: It depends on how you want to use your prepaid card. But if you have school children that you can’t give physical cash to while away to school, some banks will allow you to create sub accounts within your main prepaid card. And you can equally set limits for them. This practice will help them build financial discipline while they are still young. When they grow, they will know how to use credit card responsibly.
Maximum transactions: There are prepaid cards they you cannot use to make transactions beyond certain level. Once you have reached your limit, you may incur charges for additional transactions.
Maximum balance: This is very similar to the point mentioned above concerning the limit of transactions you can make with your card. In this case, the emphasis is not on the number of transactions but your card balance. Even though you have money to load into your card, banks may impose limits on the maximum amount you can load into the card. If this amount is too low, you may not be able to make large purchase using the card.
Minimum balance: Another feature a prepaid card may have is the imposition of minimum balance. What this means is that you will not be able to spend all the money you load into your card. That is, zero balance is not allowed. This may apply to banks that don’t charge you fees on the use of the card. Through this, the banks will be able to earn interest from the minimum balances from various customers. If the minimum balance is too high, you may be tying down your money unnecessarily.
Bonus: Just like credit cards, some prepaid cards offer cash back as incentive to customers. But if you are not making large purchase, this feature may not worth it as you may end up paying more in term of fees.
Card to card transfer: This is the ability to transfer fund from one card to the other. The transfer can be from your own card to another card that you own or to someone’s card. This may be a good way of settling debts or giving gifts.
Card membership benefits: As the competition in card market is getting stiffer, some banks now offer their customers certain benefits such as purchase protections, insurance of fund to certain limit (FDIC insured) and further protection in case your card is lost or stolen.
Terms and conditions: In all, you should read the fine print behind all the promises made to you. They are usually subject to certain terms and conditions. You should endeavour you read and understand these terms. If there is any that is not clear to you, please ask questions.
Advantages of Prepaid Cards
You may be wondering why some people may decide to choose prepaid card while there are other cards in the market. Well, that may be as a result of certain advantages which will be discussed below:
Convenience and safety: It is actually convenient carrying a small plastic card in your purse than carrying cash. Besides, it is safer when you have your cash loaded in the card. Even if people notice that you have a prepaid card with you, they can’t tell the cash value. You will agree with me that a prepaid cash value of $20,000 will not attract people as when you carry that amount in cash. In case your card is lost, that does not mean that your identity has been compromised. Your prepaid is not linked into any account that contain your sensitive information such your Social Security Number.
No credit check: Prepaid cards are cards for people with bad credit. If you have been denied credit cards or you know that you don’t have good credit that will allow you get credit card, prepaid card may be good for you. Banks do not perform credit checks on customers before they issue prepaid cards. One can say that it is guaranteed that you will not be denied in as much you have your money.
No specific level of income: If you want to apply for credit card, the credit limit you will be granted will depend on your credit score, available credit and the level of your income among others. In the case of prepaid cards, no specific level of income is required.
No checking account: Before you can open checking account, you need to meet some requirements. These requirements may not be necessary for prepaid cards. Prepaid cards don’t even require checking account. So, this makes it easy for people to get.
Helps control spending: For people who cannot control their spending with credit cards, prepaid cards can help them inculcate the habit of placing limits on their spending since they cannot spend beyond the cash value of the card.
Acceptability: Prepaid cards are widely acceptable across retailers’ shops, stores, supermarkets, ATMs all around the country. So, it actually reduces the risk of carrying cash.
Cash withdrawal: In case you need cash, you can use your prepaid card to withdraw cash from ATMs.
Online payments: You can pay your bills from the comfort of your home. You can also buy things online and be sure that the goods will be delivered to you.
Overseas purchases: You don’t need to bother yourself about currency exchange. If you use your card to make purchase overseas, the currency conversion will be done automatically even at good rates. However, you need to be sure that your prepaid card is accepted overseas. Also, certain charges may be involved.
Benefits: Just like credit cards, certain prepaid cards offer certain benefits such as cash back, insurance, further protection to customers.
It doesn’t harm your credit: Unlike credit cards which can hurt your credit when you miss your payment or when you make late payment. In fact, late payments and missed payments can stay in your credit report for seven years. And this can lower your credit score. You don’t need to make any repayment in the case of prepaid cards. You only need to reload your card and this is not reported to any bureau agency. You load your prepaid card when it is convenient for you. You don’t have to deal with problem of late or missed payments.
Corporate and Government Agency’s Use: Instead of giving cash to employees, some companies including government agencies are now using prepaid cards to advance money to their staff. Spending on prepaid cards can also be restricted by setting a limit to the amount a person can spend on their card. The truth is that they can’t even spend beyond the cash value of the card.
Read Also: Credit Score: How to improve credit score
Disadvantages of Prepaid Cards
Prepaid cards are not without disadvantages. Few of these disadvantages are discussed below:
Various Fees: You may be charged various fees such as activation fee, balance inquiry fee, ATM withdrawal fee and monthly maintenance fee etc. These fees can become substantial when added up.
Overdraft: You can’t spend beyond what you have in the card. There will be some situations when you will need to make payment and you will not have access to fund.
Credit Score: It doesn’t matter how disciplined you are in your spending, you can’t use prepaid cards to build your credit as the transactions you make using the card are not reported to bureau agencies. Credit history is one of the major factors used in calculating your FICO score
Less regulation: Prepaid cards have less regulations to protect consumers. You will discover that there is no liability protection for customers in case their cards get lost or stolen. Although there are few banks that offer protection such as FDIC insurance and protection from unauthorised use of the cards, these are at their own discretion. Therefore there is no guarantee that the protection will be adequate.
Inadequate Disclosures: When you shop for credit cards, you can easily compare the applicable interest rates. But in the case of prepaid cards, there is no adequate disclosure of fees and terms. This makes it difficult for consumers to make comparison.
In conclusion, I like to mention that prepaid cards are not only for people who can’t open a checking account or those people who can’t get their credit cards application approved. People who have credit cards or checking account also use prepaid cards as complement. Some of them use it to control their spending. It is like a form of budgeting tool. They know that they can’t spend beyond the amount which has been loaded into the card. This prevent them from overdrawing their checking account neither do they need to spend beyond what they can conveniently pay back on their credit cards. Despite the fees one may need to pay when using prepaid cards, it can still be less expensive when you compare it with the overdraft fee, late payment penalty fee you can incur if you overdraw your checking account or you exceed your credit limit and you can’t pay back the money on time.