What are prepaid cards?

Pre-paid cards or network branded prepaid cards are not credit cards, although they are sometimes marketed as “prepaid credit cards”. No credit is offered by the card issuer and the cardholder spends money which has been prepaid to a card. The value is not physically stored on the card. Instead, the card number uniquely identifies a record in a central database, where the balance is recorded. In many ways, a reloadable card is similar to a credit or debit card. Like most debit and credit cards, many reloadable cards carry a logo from one of the major electronic payment networks; Visa, American Express, Discover or MasterCard. Any business that accepts these logos around the world are likely to accept the reloadable card.

Prepaid cards have been marketed to consumers with poor credit who are unable to qualify for the line of credit that backs a mainstream credit card. The fees associated with these cards are often very high. Though convenient, these cards can be an expensive way to spend your own money.

A major difference between prepaid cards and a credit or a debit card is that the cards have to be “loaded” before one can use them. In other words one must put money on the card before one can use it. When the balance gets low, one can reload (add more money) as the name implies. Depending on the card, one can reload online, in person, and/or through a direct deposit from a work place.

Prepaid cards advantages:

1. The cards can be safer than cash. If the card is registered with an issuer and it’s lost, one can recover their full balance.
2. They are convenient like credit cards but don’t allow users to carry a balance.
3. Account activity does not impact one’s credit.
4. Credit checks are not required to get a prepaid card.
5. Prepaid cards that allow direct deposit may save one some money by allowing online and telephone payments for other debts just like a credit or debit card.
6. The money on the card is protected by the FDIC insurance or by laws requiring consumers to have access to those funds.
7. A prepaid card “may” teach young people how to use credit cards responsibly and how to stick to a budget.
8. Prepaid cards can be used internationally.

Disadvantages:

1. Prepaid cards are loaded with fees that make them more expensive to have and to use.
2. Prepaid cards cannot help one establish or build a good credit history

For more information on this and other types and uses of credit cards visit the Federal Reserve “What You Need to Know Series” at http://federalreserve.gov/consumerinfo/wyntk.htm or the University of Florida Family Youth and Community Sciences at http://fycs.ifas.ufl.edu/

0