By  Updated on Thu Nov 8, 2012

Tips for Using a Prepaid Card the Right Way

Tips for Using a Prepaid Card the Right Way

There is a lot of advice floating around in the personal-finance arena that suggests prepaid debit cards are inherently evil and are an ineffective way to use your money. While there is a lot of controversy surrounding the plentiful fees and high costs associated with some prepaid cards, there are ways to utilize the cards for your benefits. The amount of prepaid cards being used is on the rise, which indicates people are not shying away from using them but perhaps have learned a better method to get the most out of a prepaid card.

How They Work

Prepaid debit cards are not based on credit. They are not related to a person’s credit history but can still offer the same protections as major credit cards. The debit cards that are network branded with MasterCard, Visa, Discover and American Express can help protect your money if the card is stolen or lost and used for unauthorized transactions. While not all debit cards offer the same coverage, many do, so it is your responsibility to select the right kind of card.

Prepaid cards require a purchase for the amount on the card plus an assortment of fees including a one-time activation fee, a monthly user fee, or transaction fees for purchases, cash withdrawals, overdraft fees, and even inactivity fees. Not all cards carry every fee. Again, it is the responsibility of the consume to understand the fees that each card carries in order to make a smart purchase decision. Just because you paid $100 for a prepaid card doesn’t mean you’ll have the full $100 to spend after fees are considered.

How Best to Use a Prepaid Card

There are several situations where a prepaid debit card is a great resource to have — provided that the fees are not atrocious. Here are some examples of beneficial ways to use prepaid debit cards effectively:

Young Spenders

Credit cards are not provided to individuals under the age of 21 without significant proof of financial stability. For this reason, a prepaid debit card is a good choice for teens who need not carry cash such as when traveling or when leaving home for college. Parents can load the prepaid card with funds and there is no hassle over lack of credit or lack of income where the young adults are concerned. Prepaid cards help parents avoid the risk of entrusting their children with a credit card too early in life.

Electronic Deposits

Government agencies and other companies are now relying on the ease of prepaid cards to pay benefits including food stamps, unemployment and even compensation benefits for injured workers. Prepaid cards help keep costs down because there are no paper checks to print and mail to recipients. Depositing funds electronically also helps to make regular payments more reliable. Those receiving the funds are able to use their cards more effectively than having to wait for a paper check in the mail.

Online Shopping

Those who shop online but are unable to get a credit card — likely due to low credit scores — can use the protection of prepaid debit cards when making transactions on the web. Since most online retailers will not accept cash or a personal check, a prepaid card may be one of the only ways to buy items online. The cards can also be used to pay bills online if their credit allows for credit card payments.

Gifting

People who tend to give cash for special occasions may want to consider the additional protections of prepaid debit cards for gift-giving. Rather than send money in a card and risk having the money stolen through the mail process, a prepaid card can be used instead of cash. Gift recipients can then use the card for any gift they want to purchase for themselves including items from online retailers. It is a more convenient way to send money for a gift that also offers flexible spending options.

Research Your Options First

While there are many positives for using prepaid debit cards, the main drawback is the fees. While the activation fees are paid for by the card buyer, the other fees associated with some prepaid debt cards will be the responsibility of the card user. There are many complaints about the insanely high and multiple fees associated with prepaid cards but not all cards are alike. Shopping for a prepaid card should involve some comparison research to find which cards have the least amount of fees and are protected by a major credit card provider. With some background research, consumers can locate prepaid debit cards that are reasonable when they have a need.

Prepaid debit cards should never be a substitute for a bank account. Many consumers have unwisely cashed their paycheck and put all funds on a prepaid debit card. Despite all of the new financial technology available, a bank account is still the much preferred place to stash your cash. Putting all of your eggs in one basket can prove disastrous. Use a prepaid card for special situations but rely on your bank account for the majority of your finances — unless, of course, prepaid cards wind up replacing checking accounts.

 

 

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  • jrwells5

    This was a great article until the last paragraph when opinion over took reality. Fortuitously millions of consumers since 2001 have recognized that prepaid cards provide an FDIC-insured bank account which does not subject them to the abusive fees of banks. Apparently you are unaware of an entire payroll card industry and the fact that the federal and state governments use prepaid card to distribute salary and benefits. Stating that prepaid cards should never be substitute for bank accounts is absolute nonsense.