Are prepaid cards the best option for you?
In this article you will learn the answer to the question: Are prepaid cards the best option for you? Read it and find out!
With prepaid cards you have tight control over your spending, but this comes at a cost
Similar to reloadable gift cards or stored-value cards, a prepaid card is nothing but a debit card that allows you to load it with a cash balance.
You can use this type of card wherever merchants and stores accept its particular network, be it Visa, Mastercard, American Express, or Discover.
Prepaid cards can be purchased at convenience stores, supermarkets, and other outlets. They can also be acquired directly with their issuers, which do not have any credit requirements for approval.
This also serves to point out that prepaid cards do not work as credit builders because their activity is not reported to credit bureaus.
So keep reading to find out the answer to the question: Are prepaid cards the best option for you?
How do prepaid cards work?
When you get a prepaid card, you can load cash onto it using different methods. Prepaid cards come with an account and routing number.
With this number you can load it with cash at participating stores, through direct deposit or at an ATM.
You can also arrange for your paycheck or government benefit to be directly deposited onto your card. With the card loaded, you can use it in the same fashion as you would a regular credit or debit card.
You can use your card to make purchases at physical stores or online, make withdrawals from ATMs and even pay your bills with it.
It is even possible to make transfers, review transactions, and keep track of your balance using the card company’s app. When your balance is $0 you do not incur the risk of running into overdraft fees.
These cards will only allow you to spend as much as you have loaded onto them. If the money is over, you can reload the card whenever you want.
Another convenient feature of prepaid cards is that you do not need a bank account in order to get the card.
This is great news if you do not want to have a bank account, because nowadays it is virtually impossible to avoid cash-free transactions.
However, the question remains: Are prepaid cards the best option for you? Find out in the next section of this article.
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Who are prepaid cards good for?
Prepaid cards offer a number of advantages over typical debit or credit cards. However, are prepaid cards the best option for you?
You will reap the best benefits from prepaid cards if you are looking to do some of the following things.
1. Avoid overspending
As we have mentioned before, with prepaid cards, you can not spend more than the amount you have loaded onto them. This makes them an extremely helpful budgeting tool.
They can help you even if you already have a checking account. You can add a fixed amount on your prepaid card each month for a specific type of spending and once it is over, it is over.
2. Get rid of overdraft fees
According to research firm Moebs Services, the average overdraft fee in the United States in 2021 was over $33 per transaction.
Yes, banks do not think twice before punching them in the nose with expensive penalties.
Of course, you can turn off overdraft protection to prevent such penalty fees, but banks bank on your ignorance.
They know you are lazy and probably will not do it. They count on it. So if you keep running into these kinds of fees, just get a prepaid card and get rid of them altogether.
3. Protect against losses
With prepaid cards, if you become the victim of fraudsters, you only lose what you have loaded onto your card.
For that reason, it may be wiser not to load the card with your whole paycheck or government benefit.
Also, the Electronic Fund Transfer Act covers prepaid cards. This means your card issuer is obligated to investigate and refund unauthorized charges or errors if you file a report in time.
Some card networks offer additional protections, but these usually require that you register the card with the issuer.
It is also worth pointing out that the Federal Deposit Insurance Corporation (FDIC) insures most cards, including prepaid cards. Their insurance protects balances of up to $250,000 in case the bank fails.
4. Improve your banking history
Institutions know when you leave unpaid fees behind with their competitors. This could come back and bite you when you try to open a new bank account.
Banks will look through your banking history, and if they close the door to you, you can still get a prepaid card. Prepaid cards do not run these kinds of checks.
5. Educate your children about money management
Many cards come with convenient, family-friendly money management tools. This makes it possible for you to load a prepaid card with your kids’ allowance and teach them how to use it wisely.
Some prepaid cards are actually tailored for that specific purpose.
6. Take advantage of rewards
Just like credit cards, some prepaid cards actually offer great rewards programs. Cards such as the Walmart MoneyCard offer cash-back rewards.
This can be extremely convenient if you have a specific budget you want to designate for Walmart purchases.
How about the downsides of prepaid cards?
Much like any financial product, prepaid cards have advantages, but they also have shortfalls of their own. Here are the two main disadvantages of prepaid cards.
1. Does not help improve credit
Just like any other debit card, prepaid cards do not report your activity to credit bureaus.
If you are looking to build credit to have access to better credit card offers, prepaid cards will not be of much help to you.
You will probably be better served on that purpose if you instead apply for a secured credit card. Secured credit cards are usually offered to people with limited or poor credit.
2. Too many fees
Many prepaid cards come with reloading fees, monthly fees, transaction fees, activation fees, and even inactivity fees if you do not use your card for a long period of time.
Prepaid cards that offer cash back rewards can easily render rewards worthless due to fees.
Issuers are obligated by the Consumer Financial Protection Bureau to provide a chart on the outside of your card packaging with all the card’s fees in it.
Prepaid cards can be extremely useful tools, as we have detailed in this article. However, you must compare options before opting for one.
Consider fees when you look at offers and make sure you will be able to actually reap rewards if that is what you are looking for.
And if you’re looking to earn some rewards while you use your credit card, check the following content with the best cashback credit cards for you to apply right away.
Find out the best cash back credit cards for your everyday purchases. We’ve compiled a list with the cards that offer top rated rewards to help you get choose the best!
About the author / Danilo Pereira
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