A recent study by Javelin Strategy & Research found consumers are starting to favor a different type of plastic. The financial industry research group found that the use of reloadable prepaid debit cards is on the rise as the use of credit cards has started to dwindle. Prepaid cards are essentially traditional debit cards without a bank account.
“We do get a lot of interest in these types of cards,” Credit.com spokesperson Gerri Detweiller tells MainStreet. She agrees that the cards are “very popular” with unbanked or underbanked individuals who don’t qualify for a traditional line of credit. They’ve also become a frequent choice of college students, thanks, in part, to the Credit Card Accountability, Responsibility and Disclosure Act, which prohibits companies from issuing credit to anyone under 21 unless the applicant has a stable source of income or a willing co-signer.
Moreover, Detweiller points out that low-income individuals who can’t fund the credit line for a secured credit card often opt for a prepaid debit card instead, which enables users to put a specified amount of money on a plastic card that can be accessed immediately.
“With a prepaid card, you can go out and spend the money tomorrow,” Detweiller explains. This differs from a secured credit card, which requires customers to put down a sum of money upfront that will match their line of credit. Of course, this money isn’t intended to pay off the card’s existing balance; it’s meant to serve as collateral and subsequently minimize default risks. As such, those living to paycheck to paycheck typically have to forego a secured credit card since they don’t have to funds to insure the credit line.
However, both Detweiller and other industry experts maintain that those in the market for new payment methods shouldn’t be swayed simply by a prepaid card’s accessibility. For starters, it will have no effect on your credit score as it is essentially a gift card that can be used for general purposes.
“Your activity is not reported to credit bureaus, so it doesn't help your credit,” Tim Chen, CEO of NerdWallet.com explains.
Additionally, unlike traditional debit cards, prepaid cards don’t draw interest and can’t be tied to a savings account. Another major difference between the two payment options is that prepaid cards tend to have a laundry list of fees associated with them that may outweigh their convenience. According to Detweiller, in addition to monthly maintenance charges, fees on prepaid cards can be incurred when cardholders:
• Load money onto the card
• Request a paper statement
• Need to talk to a customer service representative directly
• Go for prolonged periods of time without using the card
• Cancel the card, in the event you are dissatisfied with the service
In light of these fees, Chen points out “anyone considering [a prepaid card] is probably better off just opening a checking account and getting a standard debit card.” In fact, he says, secured cards are the better option for those trying to rebuild their credit as well, though admittedly those tend to have a lot of fees associated with them.
The upside to a secured card is that it will typically carry better fraud protection policies than prepaid cards. (For a detailed explanation of the different rules that apply to both, check out our article on dealing with debit card fraud.)
Of course, prepaid cards aren’t without their appeal. Those who are unbanked may want to use them to buy items online, rent a car or make other large purchases. Should you opt for a prepaid card, you should treat it as you would any debit or credit card and comparison shop. Bruce McClary, spokesperson for ClearPoint Credit Counseling Solutions, says two major criteria should be applied: Cards should come with a major card issuer’s logo (like Visa or Mastercard) so you know they can be used anywhere and the card you select should have the least amount of fees attached to it.
If you are inclined or forced to choose to a prepaid method of payment, MainStreet has a roundup of cards that are your best bets:
Mango Prepaid MasterCard
This card is recommended by Credit.com since it carries no activation fee if you load $500 onto it initially. There is also a $20 sign-on bonus, and no monthly fee is applied if you reload at least $5 onto your card every month. However, those failing to reload their cards will incur a $5 charge. There is also a fee of $4.95 to reload the card at an outside retailer, such as CVS or Rite Aid, and a 50-cent fee for an ATM balance inquiry. Most charges, however, can be avoided if you service the card online.
This card has a variety of fees associated with it, including a $9.95 activation fee, a below-average $3.95 monthly fee, a 95-cent fee for PIN purchases, a $2.95 paper statement fee and a 95-cent ATM balance inquiry fee. Still, Chen recommends the card because it offers rewards. For example, users earn one point per $1 if you sign (rather than use a PIN) for your purchases. Points are worth half a cent when used to purchase prepaid wireless minutes with AT&T, Verizon, T-Mobile and TracFone. Additionally, direct deposit, Paypal transfers and ACH transfers are all free. And similar to the Mango card, many fees can be avoided by servicing the card online.
This card offers a low activation fee of $9.95. The residual $9.95 monthly fee can be bypassed if you load $3,000 or more onto the card during that month. Much like the Mango card, there is no fee to reload the card unless you use a third-party outlet to do so. Other fees include $1 to check a balance through an ATM, $2 to talk to a customer service representative over the phone, and a 50-cent charge to check the card’s balance via telephone. Online services, however, are free.
Vision Silver PrePaid MasterCard
With this card, you can avoid the $9.95 activation fee if you use the card’s mail-in rebate form, which is available when you enroll online. The card carries a low $3.95 monthly fee and free signature purchases, but you will incur a 95-cent charge on PIN purchases . You can reload the card for free directly through the provider. Online services are free. But other fees to be aware of include a $14.95 cancellation fee, a 95-cent ATM balance inquiry fee and a $2.95 paper statement fee.
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