WHY ARE PREPAID CARDS SO POPULAR?

The credit card companies are doing everything they can to grab what little cash may still be out there before the recently-passed regulatory reforms kick in.  It’s going to be tougher for them to jack up interest rates and to otherwise extricate cash from the wallets of their customers, so they’re behaving in ways that tend to turn people off a bit.

Meanwhile, the economic downturn has whacked many people so hard that they can’t even think of getting the kind of credit cards everyone was offering them a few short years ago.  Then there are those who can still score a line of credit, but who are wary of doing so after watching friends and families get the beatdown.

Add parents of college students who don’t want the freshmen in their lives bleeding them dry and you have a whole lotta love pointed in the direction of prepaid credit cards.

Prepaid cards seem like a perfect option on a variety of levels.

• They allow you to avoid interest rate “usury” and being at risk of account closures or changes.
• They allow someone  with a wrecked credit score to tote a Visa or Mastercard in their wallet.
• They prevent you from digging yourself into a big ol’ debt hole.
• They stop the kid from maxing out card after card on pizza, beer, concert tickets, God-knows-what and an occasional textbook.

All hail the prepaid credit card, right?

Maybe.  Maybe not.

THE DARK SIDE OF PREPAID CREDIT CARDS

You see, there is a downside to prepaid plastic.  Many of them come with an assortment of fees that can turn them into less-than-stellar options.

There are transaction fees.  There are reload fees.  There are inactivity fees.  Heck, some of them will even charge you to check your balance, allowing you to run out of money simply by looking at your money.

Monthly fees?  Yes.  Annual fees?  Sometimes.  Some of these prepaid cards will charge you a fee just to call customer service–you can go poor calling to find out while you’re poor.

If you yank out some cash from the automated teller, they’ll nick you for that, too.  So will the bank who’s running the ATM.  And if you somehow find a way to spend in access of your available funds they will, of course, hit you up with a fee.

THE DEBIT CARD ALTERNATIVE

A pre-paid credit card isn’t really a credit card.  No one’s extending anyone credit.  They’re just allowing you to use your card to spend your own cash.  Yes, the piece of plastic in question has a Visa or Mastercard logo on it.  Beyond that, though, there’s nothing all that credit-y about the whole affair.

That’s a familiar story for most of us.  Our banks offer the same thing.  They call it a debit card and it’s tied directly to the amount of cash we have in our checking accounts.

While debit cards can have fee problems of their own, the collection of charges is usually minimal compared to those associated with prepaid credit cards.

That makes your debit card a cheaper, functional alternative to prepaid credit cards for many consumers.  However, there are reasons to go prepaid instead.

THE PREPAID ADVANTAGE

There are times when you need a card and your debit card won’t do the trick.

Some banks are still stuck in the ’80s.  They issue non-branded ATM cards but don’t have a Visa- or MasterCard branded option.  Those old ATM cards can still be handy, but you can’t actually buy anything with them.  You can just snag cash from your ATM.  That’s one reason to consider prepaid.

Another is the fact that some businesses won’t allow the use of a debit card and insist on an actual credit card in order to effectuate a transaction.  Try to rent a car with your debit card and you’ll know what I mean.  A prepaid card, however, will often fly under the radar at these establishments, allowing you to get things done without a traditional piece of plastic.

Finally, and most importantly, the credit bureaus still see prepaid accounts as credit cards.  They don’t perceive them as debit cards.  That means someone who is looking to repair his or her credit history (or to establish one, for that matter) can get mileage out of a prepaid credit card in ways they can’t with a straight debit option.

THE BOTTOM LINE

A prepaid credit card can seem attractive compared to a traditional card these days, but the fees can unravel their value.

If you have a good reason to use a prepaid option, do everything in your power to track down a card that isn’t going to nickel and dime you to death.  While almost all of them have a wide assortment of fees, some are appreciably better than others.  If you wanna go prepaid, be smart about it.