Prepaid Debit Card Do’s and Don’ts

Prepaid debit cards are currently a staple in the financial sector, especially since more than 2 billion people are without bank accounts. The most common uses for the cards are bill payments, check cashing, shopping online, and gift-giving. A large number of prepaid card purchasers are consumers that don’t have bank accounts. In one large survey of consumers without accounts, only 4% of the participants said they didn’t need a checking account. Which means the remaining 96% need an account, but are not able to open one for some reason.

One reason people gave for not having a bank account was that they didn’t have enough money. Following close behind were the consumers whose bank accounts were closed because of overdrafts. Deficiencies like these create a need for prepaid debit cards. If used correctly, they can be a good financial fix. Misuse leads to frustration and a massive headache.

Topics:

• The Cashless Transaction Trend

• How a Prepaid Card Works

• Do’s and Don’ts

• Prepaid Debit Card Fees

• Secured Credit Cards

The Cashless Transaction Trend

It is currently plastic, not cash, that is king of the financial kingdom. The number of establishments that require or prefer customers to pay with debit and credit cards increases with each passing year. Some of these merchant transactions include:

• Booking hotel reservations

• Renting vehicles or equipment

• Eating at restaurants

• Online shopping

• Direct payroll or other deposits

• Retail store purchases

The plastic-only trend is encouraged by credit card companies. In 2017, Visa challenged small business owners to start accepting only credit card payments from customers. They offered an incentive of $10,000 to make the switch to 50 companies. Entrepreneurs favor cards over cash for two primary reasons: security concerns and faster transaction time. For the same reasons, more consumers prefer to pay with debit cards, when asked. Even though large cities are beginning to ban cashless establishments, payment by debit and credit cards far exceed cash transactions.

How a Prepaid Debit Card Works

Paying bills and cashing checks are not the only reasons prepaid credit cards are so popular. In the United States, 68 million people have bad credit or poor credit scores under 600. Roughly 3% of Canadian borrowers have scores below 520, depending on the province. Low credit scores mean credit card denials or, even worse, credit cards with abysmally high interest rates. That’s where prepaid cards come to the rescue.

The cards let people with damaged credit or no bank accounts complete most of the same transactions as those with stellar credit. Prepaid cards look like credit cards, but don’t work the same as regular credit cards. The primary differences between the two are:

1. All applications for prepaid credit cards are approved.

2. 100% rate of approval because they are funded by the purchaser in advance.

3. The card limit equals the cash amount that is loaded on the card, rather than a limit approved by a financial institution.

4. Unlike regular debit cards, they are not attached to a bank account.

5. Charges cannot be made and paid for later since they are not tied to a line of credit.

6. Prepaid debit cards do not improve credit.

7. No credit check is needed to apply

Once money is loaded on the prepaid card, the user simply makes transactions up to the amount that is on the card, less fees. The card will be declined if there is not enough cash available on the card. The owner can add more money to the card when necessary to increase the limit.

Do’s and Don’ts

People without a bank account or with bad credit enjoy the conveniences of prepaid a debit card. With it, they can make purchases online, accept direct deposits, and perform other transactions. Below are some best use suggestions for prepaid cardholders.

• Shop for the lowest card fees since they vary among issuers.

• Ask whether the card comes with Visa, MasterCard or American Express liability protection for certain purchases.

• Make sure prepaid cards are accepted in the region when travelling out of the country.

• Use the card as a budget tool to control spending.

• Risk additional fees by trying to purchase something above the balance on the card.

• Count card fees as part of the available balance.

• Get charged dormancy fees for not using the card in a certain time period.

• Confuse a prepaid debt card with a secured credit card.

• Give up on improving credit by other ways such as secured credit cards.

The first thing to consider before buying a prepaid card is where it will be used. If the card is accepted at establishments that they frequent, consumers can purchase a card with a low denomination balance to try it out first.  It is important to carefully read the details in the fine print before using the card to understand the terms, fees, and conditions of use.

Fees

Fees are attached for the use of prepaid debit cards. Among them are charges for ATM withdrawal, loading fees, and transaction fees for each purchase. Depending on the institution, fees can cost up to $5.00 for the monthly maintenance fee, $2-$3 for ATM fees, and $0 to $4 per transaction. Customers pay to check balances, for paper statements, and replacement cards. The customer is also charged for declined purchases due to an insufficient balance. 

Prepaid cards can be purchased at banks, grocery stores, retail establishments, and online. There are a few places that sell cards with little to no fees, although some costs might be attached. Despite all of the fees attached, sales of prepaid cards continue to increase, even among high income consumers. 

Some reasons for the uptick in the sale of reloadable prepaid cards:

Secured Credit Cards

Another option for improving credit scores is a secured credit card. While often confused with a prepaid debit card, one major difference is that use of the card is reported to credit bureaus. Secured credit cards also offer loyalty rewards, choice of payment dates, and the opportunity to apply for a regular credit card with good payment history.

Applicants with bad credit have a good chance of approval with secured credit cards, partly because they must pay a deposit up front. The issuer uses this amount to determine the credit limit and as collateral in case of default. Secured cards offer the same convenience and spending flexibility as prepaid debit cards and credit cards. Fees for secured credit cards are lower than prepaid debit cards. Payments can be made by mail, online or in person.

Prepaid cards now include added features that help consumers control spending. Some card companies let consumers pay their bills online and get text alerts when bills are due. A number of issuers also offer financial tips and will link cards to interest bearing savings accounts. Purchasers should always get prepaid cards from banks or other financial institutions that are not at risk of folding (like some “celebrity” prepaid cards have recently). Used appropriately, prepaid debit cards can be another of many convenient tools for finance management.