Prepaid cards, also known as prepaid debit cards, have grown in popularity over the last several years. In fact, the global market for prepaid cards is projected to reach $3.1 trillion by 2022, according to an April report by Global Industry Analysts, a business strategy and marketing intelligence source.
This projected growth is driven by the โgrowing need for financial inclusion of unbanked consumers, provision of innovative card features and services, increasing volumes of online transactions and rising demand for cost-effective electronic payment solutions,โ Global Industry Analysts said in the report.
But does all that popularity mean a prepaid card is a good choice for you? Prepaid cards, which let you load money onto a card and use it just as you would a debit card, could potentially be a good choice if:
- You have bad or no credit
- You want to keep a tight rein on your spending
- You want to give a gift of money
- You want to help your child learn to manage money responsibly
- You want to save for a special occasion by loading up a card with money youโve saved for a trip or a shopping spree
If any of these describe your situation, here are seven things to keep in mind when considering a prepaid card.
1. Thereโs No Deposit as Collateral
The nice thing about prepaid cards is thereโs no need to make a deposit thatโs held by the bank, as you would with a secured credit card. A prepaid card can be used just like a check, and can be more convenient.
2. Thereโs No Interest
There are no interest charges (since itโs not a line of credit), and you canโt typically overspend on a prepaid card. If youโve reached the limit of your funds, your purchases will be rejected unless youโre using a type of prepaid card that allows overdrafts. Managed carefully, a prepaid card can help you avoid debt and finance charges.
3. Thereโs No Credit Check
Thereโs typically no credit check for a prepaid card since itโs tied to your money and not a loan from a financial institution. No matter how bad โ or non-existent โ your credit is, if you have cash to load onto a prepaid card, you can probably get one and use it in place of a credit card.
4. Lose the Card, Possibly Lose the Cash
One of the negatives about prepaid cards is, if you lose the card, you could wind up losing the money you loaded onto it.
โIf lost, you will be subject to the issuerโs terms, which are different from credit cards and may result in financial loss unless reported immediately โ and possibly other steps like pre-registering the card before use,โ Thomas Nitzsche, media relations manager for ClearPoint Credit Counseling Solutions, said in an email. โYou should check the terms and conditions of the particular card you are considering and keep all the information on the account handy in case of theft or loss.โ
5. Thereโs No Credit Effect โ Good or Bad
Prepaid cards, unlike secured credit cards, arenโt reported to the three major credit reporting agencies, so using one wonโt affect your credit score. That means you canโt use it to help build your credit as you would with a credit card (or a secured credit card).
โPrepaid cards are helpful when you want to limit the amount of money that is being used, are giving funds as a gift, or simply do not want to carry cash without impacting your credit in any way,โ Nitzsche said. โIf your goal is to simply help a child live within means, not build credit, then a prepaid card is a good tool to keep new college students on track with their spending money.โ
โA secured card and/or a โcredit builder loanโ are absolutely the better options for helping you establish or rebuild credit if you are unable to secure a traditional credit card,โ Nitzsche continued. โJust ensure that whatever products you select report to all three credit bureaus and use the accounts carefully.โ
6. Reservations Might Be Tricky
Some merchants might not accept your prepaid card to hold a car rental, hotel reservation or other situation where a security deposit is required.
7. Thereโs Limited or No Fraud Protection
If your card is stolen, you have fewer protections than you would with a credit card or secured credit card. Credit cards are covered under the Truth In Lending Act, which caps liability at $50. Prepaid cards, however, are not covered by that law, and liability for fraudulent purchases can often match that of debit cards, meaning it starts at $50 and can go up from there the longer the fraud goes unreported, but that is voluntary to the card issuer.
Manage Your Cards Wisely
Remember, whatever kind of card you choose, keeping your spending and/or balances low is key to good financial management. If you want to positively impact your credit scores, itโs a good rule of thumb to keep balances on credit cards at less than 10% of your available credit limit, and 30% max. You can find out how your debt usage ratio affects your credit scores with a free credit report card from Credit.com.
If you think a prepaid card is the right choice for you, you can find a variety of offers using Credit.comโs credit card search tool. Itโs important to read all the fine print carefully on card offers. Compare any fees involved, including monthly maintenance fees, activation fees and ATM use fees. If you use a card that lets you spend more than youโve deposited, you could incur hefty overdraft fees.
Image: PeopleImages
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