Prepaid Cards – The Good and the Bad

Last January, I asked a credit card insider where the growth and focus of their company would be over the next couple of years. Without hesitation, the person told me that it would be in the area of prepaid credit cards.

With recent, and much stronger, consumer and financial legislations, more and more of the emphasis of credit card issuers will be on marketing prepaid reloadable debit or credit cards. For the last few years, we have become used to seeing them marketed as Christmas gift cards, but that will now be year-round.

These cards will be the main tool which banks will use to strengthen their relationship with younger people, and especially students, who cannot obtain a credit card on their own. The bank marketing will also focus on lower-income people, anyone with big credit problems, and those who have no current bank relationship. On the surface, prepaid cards can seem like a good idea, but be careful, because they are heavy on fees, and light on consumer protection.

Prepaid cards do not cover you for the same fraud protection as credit cards. If your card is lost, stolen, or fraudulently used, you are liable for the loss. Each issuer has voluntary guidelines and protections that you’ll need to understand before you get the card, and before something unforeseen happens.

Plus, you are not building, or rebuilding, credit with a prepaid card. You are paying the money up front and receive a plastic card to use up to the amount you have already given them. The issuer is not extending credit to you, so you will not have your activities reported to the credit bureau.

The good news is that provincial legislation, from BC to Ontario at least, now prevents cards from having an expiry date, or a monthly activity fee.

With a wide variety of other fees, here are some of the questions you need to get answered before choosing a card:

Activation fee amount: Most cards charge to get the card set up and activated. The Walmart Money card is one of the cheapest, but others can charge up to $30.

Cash advance fee: All cards will charge you a fee to get a cash advance from an ATM. As a result, you need to commit to never using the card to obtain cash. But do ask, because some have one or two free withdrawals.

Statement fee: All cards will let you check your balance online, but most will charge you for a mailed statement.

Balance inquiry fee: If you can’t wait until you can get online, almost all cards will charge you for a balance inquiry through an ATM. It’ll be their fee plus whatever the ATM provider charges on top of that.

Inactivity fees: The rule of thumb is that these won’t get charged for at least a year or more. If you are frequently using the card, it may not matter as much as someone who only intends to use the card occasionally.

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