You see them everywhere, Visa or MasterCard gift cards that can be “loaded” with a certain spending amount and used to for your purchases. They are great ways to monitor spending and rebuild your credit. Easily available in most stores or online, you select from any number of “gift” credit cards, deposit the amount you want to manage, and use plastic instead of cash for purchases. When that amount is gone, you may have the option to reload the card with new money deposit and continue using that card. It all sounds great! But with the great comes a word of caution.
Read the Small Print
- Prepaid credit cards do help rebuild bad credit and offer spending options, they also carry hidden fees that can reduce the deposited spending balance. Make sure to read ALL the small print to avoid fees that leave you with very little to spend on yourself.
While you may not incur an overdraft fee if you go over your prepaid limit, the card issuer may require immediate payment of the overdraft. Failure of repayment results in card cancellation with no renewal option. If the card expires, the issuer may reject any further purchases even if you submitted a reload deposit. And for any reason, the card issuer may choose to cancel your card without notification.
- When you Google prepaid credit cards, a list of options appears. You’ll see “No Credit Check”, “100% Approval”, “Direct Deposit”, “Bank Alternative”, “Earn x% APY”, each one designed to lure you to buy from that card issuer. These are all true, but the card’s true value depends on how each card is set-up by the issuer. Did I mention to make sure to read the entire Cardholder Agreement?
The fine print may tell you that the Temporary Card is not good for monthly recurring transactions. Since it is not a regular credit card, even if the needed amount is available, it cannot be used to pay returning monthly insurance bills, car payments, or utility bills. This may only appear in the Consumer Agreement, but it is your responsibility to know this. Other hidden fees could include:
- Set-up Fee – a non-refundable fee to set-up your account. May be up to US$25.
- Interchange Fee – fees paid the merchants when the card is used for transactions.
- Merchant may pass the fee along to you in the form of higher costs or require a minimum purchase amount of US$10-$20.
- Annual Fee – regardless of how often the card is used, an annual fee of US$25 or up to 22% of the deposited balance is charged by the issuer.
- Monthly Fee
- PIN Fee – if you choose to use a PIN identifier, you are charged with each usage in addition to the purchase.
- Balance Inquiry Fee
- Withdrawal Fee
- Currency Concession Fee – could be 2% of the total amount converted
- Maintenance Fee
- Express Cash Fee
- Bill Pay Enrollment Fee
- Bill Pay Fee
- Plan Change Fee
- Replacement Card Fee
- Change Card Design Fee
- Cardholder-to-Cardholder Transfer Fee
Based on the amount of each of these fees, a prepaid credit card loaded for US$100 could incur up to US$70-$75 fees, leaving a usable balance of only US$25.
- Globally, it appears more and more consumers are turning to prepaid credit cards to manage debt and spending. As a result, U.S. and international governments are monitoring usage fees, fraudulent use, and non-disclosure of all card fees by issuers to ensure consumer receive the full monetary amount deposited to their cards. Governments continue to battle with issuers over specific legislation and consumer protection laws. With the growing trend of prepaid credit card use, the ongoing need remains to monitor and protect consumers while preventing issuers from higher costs and lower profit-margins.
Overall, prepaid credit cards are a good resource for managing debt and regaining control of your spending. It gives you the option to provide an established purchase limit, moinitor spending and see where your money goes. But the responsibility still lies with the consumer. Before signing up for a prepaid credit card read the Consumer Agreement; know all the fees attached to that card. Managing your debt means staying in control; know where your money is going on your prepaid credit card before you discover you’ve spent more on fees than on your own purchases.