Many consumers who cannot get a credit card, or can only qualify for a credit card with a high interest rate, turn to prepaid cards to make purchases and pay bills. Prepaid cards are becoming more popular -- more than seven million consumers use them.
But before you decide to substitute a prepaid card for a credit card or cash, be sure you know how they work, the limits to consumer protections when using them, and the high fees that may come with them.
How Do Prepaid Cards Work?
With a prepaid card, you load money onto the card and then, as you use the card, the money comes out of that balance. Prepaid cards look like debit cards and credit cards -- they usually have a bank or credit card name brand. But unlike credit cards, where you are borrowing money each time you make a charge, with a prepaid card you are drawing upon money already deposited on the card. And unlike debit cards, the prepaid card is not attached to your bank account.
You can use a prepaid card to purchase items or services or to make payments on bills and accounts. Some let you withdraw money from an ATM machine.
Some prepaid cards (like gift cards) are not reloadable. But others are reloadable, meaning you can keep adding money to the card. Some even let you load your wages onto the card.
Prepaid cards are sold at various stores and major retailers, and offered by such businesses as tax preparation companies to pay your tax refund.
Little Protection and High Fees
Most prepaid cards do not come with protections if you lose it or dispute an item or service you bought with it. This is in contrast to the protections that come with credit cards, and to a lesser degree, debit or credit cards. (To learn about credit card and debit card protections, visit our Banking & Credit Cards topic area.)
Prepaid cards can be very expensive. Many prepaid cards have some of the following fees:
- monthly fees
- activation fees
- reloading fee
- transaction fee
- fees for customer service
- bill payment fee
- stop payment fee
- ATM withdrawal fee
- balance inquiry fee
- additional card fee
- lost or stolen card replacement fee, and
- card cancellation fee.
In combination, the fees might cost you more than a credit card with a very high interest rate.
The federal Consumer Financial Protection Bureau is considering adding rules to better protect consumers who use prepaid cards. But until protections are in place, it's better to pass on prepaid cards.
To learn more about different types of debit and credit cards, visit our Banking & Credit Cards topic area.