With the credit crisis rupturing the American economy, right now is the perfect time to teach young people the value of spending without borrowing. One way to do this is with prepaid cards that require an upfront transaction for activation, which means you can only spend what you already have. But does ditching the credit card equal a good idea for young consumers?
Prepaid cards have no credit line, are usable anywhere that Visa (Stock Quote: V) or MasterCard (Stock Quote: MA) is accepted, and can't put you into debt. They can be loaded through ATMs, inside banks, online or at certain check cashing locations. Funds can also be transferred from credit cards, checking accounts, savings accounts, or payroll direct deposit. And, because money isn't borrowed from a bank, there are no interest charges or chances of overdrawing.
"In this way, they offer many of the benefits and conveniences of credit cards," says Ben Woosley, a spokesperson for CreditCards.com which is a leading online credit card marketplace. "They are safer than carrying cash, allow for online shopping and have zero liability for unauthorized purchases. All without the pitfalls of getting into debt."
With their apparent ease, it's not surprising that prepaid cards are often marketed specifically to college students. Facecard, which is issued by MetaBank of the Meta Financial Group, is making a special push to attract college age users. According to Jonathan Dyke, the COO of edo Interactive Inc. which developed the card, the Facecard is intended to deliver banking and universal gift card services to the emerging Gen-Y consumers, a high spending demographic. Facecard and other prepaid cards are often promoted at a variety of locations like Facebook.com, college fairs and orientations, concerts, sporting events and through retailers like Wal-Mart (Stock Quote: WMT).
But before cutting up all those credit cards, consider the drawbacks to dropping your Mastercard for a Facecard. While the Prepaid cards mimic the functions of a credit card, they don't help users establish credit history - one of the top reasons college students open a credit card in the first place. And while there is no interest income for the issuer, companies do charge assorted fees for activation, monthly use, or even a per transaction fee to maintain the account.
For example, the AccountNow Prepaid Visa charges a $4.95 monthly fee, a $1 transaction fee on purchases made using a pin number and activation is only free if done through direct deposit. Similarly, the AchieveCard Prepaid Mastercard only offers free activation through direct deposit, and tacks on a $9.95 monthly fee. So while there are no fees for making mistakes like missing paying a bill, the charges can still add up.
"Prepaid is not better than credit, just as credit is not better than prepaid,” says Brian Greehan, the Director of U.S. Communications for MasterCard. “Instead, they each have certain product features that allow consumers to choose the payment vehicle that most satisfies their needs - for some folks that's credit, for others it's debit and for some it's prepaid."