Prepaid Cards: What You Should Know
Prepaid cards have exploded as an alternative payment method, with cards marketed by everyone from celebrities to retailer behemoth Wal-Mart. A quarter of Americans and a third of millennials have used a prepaid card, according to an April 2015 survey by TD Bank.
Prepaid cards are appealing to people looking to avoid debt and bank fees, but it’s important to consider the full scope of what prepaid cards offer to assess whether they’re your best choice.
Here’s what you need to know about prepaid cards, along with a few recommendations.
What is a prepaid card?
A prepaid card functions much like a debit card. Users have access only to the money in the account linked to the card. Prepaid cards offer a convenient alternative to cash, and they don’t require a credit check or a bank account to apply.
After signing up, cardholders can load money onto the card via direct deposit, a withdrawal from a bank account, with cash at one of the card’s network locations, or sometimes with mobile check deposits. They can then spend up to the loaded amount.
For the most part, prepaid cards use the same payment networks as credit and debit cards: Visa, MasterCard, American Express and Discover. This means that they can typically be used anywhere that takes credit or debit.
Prepaid cards offer some of the same theft and loss protections as credit and debit cards, though coverage differs by issuer. Unlike credit cards, prepaid cards don’t come with a credit line and interest rate, and prepaid accounts aren’t tied to bank accounts like debit cards.
Who might want a prepaid card
Prepaid cards offer a solution for people who don’t have access to or don’t want to use credit cards or banks. This is especially the case for someone with low income, no Social Security number or bad or no credit history. Because there is no credit check and no minimum income requirements, a prepaid card offers the flexibility of plastic without the extra hurdles.
Since prepaid cards don’t allow cardholders to spend more than the loaded balance, they’re also an option for teenagers, people on fixed incomes and those who tend to overspend.
Who should avoid prepaid cards
Prepaid cards may be an easy alternative if you have bad or no credit history, but you should avoid them if you want to improve your credit. The reason: You’re not drawing on a line of credit and your activity isn’t being reported to the credit bureaus, both of which are necessary to build positive credit history.
In this case, it may be better to consider a secured credit card, which is designed to help people build credit at a lower risk level than a conventional unsecured credit card. See the Nerds’ top secured card picks.
People who are wary of fees should also be careful when choosing a prepaid card. That’s because many prepaid cards have monthly fees. They may also charge for things as simple as activating the card, reloading or withdrawing cash from an ATM.
Some cards offer to waive certain fees if you have a high ongoing balance or if you reload your card monthly with direct deposit, but read the fine print to be sure. If you want to avoid fees altogether, consider applying for a free checking account and opting out of overdraft protection.
Why the Nerds don’t generally recommend prepaid cards
Prepaid cards offer valuable solutions to a small group of people. But if you plan to borrow in the future, using a prepaid card won’t help you build your credit and you’ll likely end up paying higher interest rates on future loans.
It’s better to develop good credit behaviors. This can be done by applying for and using credit wisely: Pay your balance on time and in full every month, avoid spending more than you have, keep a monthly budget and borrow only when you need it.
If you choose the prepaid route, here are some cards worth considering:
American Express Serve
In a market riddled with fees, the American Express Serve is a notable exception. As of July 2015, you’ll likely find only a $1 monthly fee, which is waived if you receive a direct deposit on the card or add $500 to the card during the month. You can reload the card with direct deposit, linking your checking account or adding cash at participating CVS Pharmacy, Family Dollar, Wal-Mart and 7-Eleven locations.
The Serve is convenient for families, allowing you to establish subaccounts for kids and set spending limits. It features mobile check deposit, online bill pay, purchase protection and Amex Offers, a program that lets you save on shopping, dining and more. The card can be used wherever American Express is accepted, but it does come with a 2.7% foreign transaction fee, if you use it abroad.
The American Express Serve charges up to $3.95 to open an account at a retail location. It’s $0 if you open the account online. It also assesses a $2.50 fee for each ATM withdrawal at non-MoneyPass ATMs. But with more than 24,000 MoneyPass ATMs in the United States, you should be able to avoid that charge.
American Express Bluebird
Like the American Express Serve, the American Express Bluebird is largely without extra costs. As of July 2015, it only lists a $2.50 ATM charge for withdrawals made at non-MoneyPass ATMs. And like the Serve, the Bluebird offers mobile deposit, easy online bill pay, access to Amex Offers, subaccounts, and easy loading via direct deposit, transferring from a checking account or adding cash at any Wal-Mart checkout register.
What sets the Bluebird apart (besides the $0 monthly fee) is that it has no foreign transaction fees and you can write paper checks with your account, which can be helpful for paying rent and some utilities.
Although the BB&T MoneyAccount card isn’t as fee-friendly as the American Express prepaid cards, it’s still not a bad choice. As of July 2015, it comes with a $5 monthly charge, which is reduced to $3 if you have a total of $1,000 in deposits or loads during the month. It offers free cash withdrawals at BB&T ATMs and charges $2.50 for out-of-network ATM withdrawals and $5 for withdrawals at international ATMs.
With the MoneyAccount, you can also add another person to your account and do online bill pay. The card does charge a 3% foreign transaction fee.
The bottom line
Prepaid cards can be good if you can’t qualify for a bank account or credit card. But if you plan to borrow for a car, house or something else in the future, a prepaid card can’t help you establish the positive credit history necessary to score a low interest rate.
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