Are Prepaid Cards Worth It?

[Update: Some offers mentioned below have expired. For current terms and conditions, please see card agreements. Disclosure: Cards from our partners are mentioned below.]

I’ve never been a big fan of prepaid cards, as many charge exorbitant fees from monthly maintenance to reloading fees. But with such rapid growth in the industry, this category of plastic is becoming a fierce contender to credit and debit cards, and I can’t help but take notice. Americans spent $140 billion using prepaid cards in 2009, according to the Federal Reserve. That’s a 21.5% jump from the previous year.

And just last week, American Express announced its foray into the prepaid card market with relatively low fees; the card only charges for ATM withdrawals (past the first free one provided each month).

It’s tempting. Prepaid cards are convenient, safer to use than cash and don’t require credit background checks. But here are some important caveats to consider before going prepaid:

Monthly fees can rack up

While the AmEx prepaid card is attractively priced, most prepaid cards have high fees. A Consumers Union report published last year found that fees run the gamut. Activation fees can be as high as $39.95 and initial load requirements range from $10 to $20 on the card at the time of purchase. Between those two fees alone, a consumer is likely to pay at least $30 to obtain or purchase a prepaid card. Monthly fees, meantime, range up to $10 per month.

You’re not building savings

One of the advantages to having an actual savings or checking account tied to a debit card is that you can earn interest on that account. Prepaid cards offer no incentive to save. They’re more like gift cards that can be used at almost any store.

The card won’t necessarily help you build credit

Beware of some prepaid cards that claim they can help you strengthen your credit. For example, Russell Simmons’ RushCard says it reports your history of paying bills with the card to LexisNexis and PRBC, a national credit reporting agency. But your traditional FICO credit score, which is the most widely referenced score by lenders—is only based on your credit activity as tracked by Experian, Equifax and TransUnion.

[Related Article: Prepaid Cards—Hot or Not So Hot?]