For several years now, financial institutions have been touting prepaid debit cards (also known as stored-value cards) for the millions of Americans who lack traditional checking accounts. Governments have used the cards to disperse unemployment benefits, disaster relief aid, and tax refunds. Employers sometimes tie the cards to health savings accounts or use them as a depository for payroll checks. In an increasingly plastic-dependent world, these cards can be substituted for cash, and you can use them to pay for airline tickets, hotel stays, electronics, and groceries. Money is transferred, or “loaded,” to the card and is yours to spend until the card runs out of funds or is reloaded.
Prepaid cards have several advantages over traditional credit and debit cards. For example, if you’re traveling and the card is stolen, losses are limited to the amount on the card. In addition, because your personal banking information isn’t on the card, thieves and con artists can’t extract that data to steal your identity. Another use: Teaching kids how to budget. Some issuers offer instant alerts that monitor card activity, which is a great way for parents to see what their teens are purchasing in real time. If you’re the one who’s prone to overspending, prepaid cards offer a built-in safety net: you can’t spend more than the amount that’s loaded onto the card.
But be aware of the lack of regulatory constraints on the cards. Issuers have great latitude over fees and prepaid cards can get expensive. Depending on the card issuer, you might be charged a fee to activate the card, use it at an ATM machine, check your balance, add more money, or talk to customer support. You might be charged a monthly maintenance fee as well. Before you buy, read the fine print.
Two more cautions: the money loaded onto these cards doesn’t earn interest, and a prepaid card won’t bolster a bad credit rating. Remember, the card is equivalent to carrying cash.
If you need help planning a budget or making major financial decisions, give us a call.