Credit cards are ubiquitous because they’re so convenient. No worrying about carrying a lot of cash or dealing with the hassle of writing checks (who does that any more?). The trouble, of course, is that it’s tough to keep track of charges and easy to blow your budget “just this once” one too many times. Before you know it, you’ve got credit card debt and the interest and fees that come with it; the very thing you don’t want in a healthy financial life. One solution: reloadable, prepaid credit cards.
How They Work
They’re just what they sound like: cards issued by the major credit card companies like MasterCard and Visa that you fill with whatever sums you choose, from $25 to a few hundred. They’re available via the credit card company’s websites and at convenience stores, drug stores, supermarkets, among other places. Once you use up the initial amount on the card you can refill it at those same stores, via deposits from your paycheck, sometimes online, or from another credit card. You can usually track your balance online, and sometimes at ATMs or the stores that sell the cards.
“Prepaid cards can be very helpful in establishing good money management and budgeting habits,” says financial advisor Timothy Wyman from the Center for Financial Planning in Southfield, MI. “You put an amount on the card and you know your spending limits—that’s a good thing.” In fact, Wyman gave them to his kids as their first credit cards. The beauty is simple: If you know you have $100 a month in disposable income in your budget, or $150 for groceries or gas, you can add that amount to card each month. When it’s gone, you know you’re cut off until the first of the next month, with no worries of interest fees or the overdraft charges that banks love to levy on debit card users.
Hidden Costs and Fees
Banks and credit card issuers can’t make these completely free—how would they make money? Consumers Union looked at 19 prepaid cards and recently issued a report on the fees they can incur, which are usually “hidden deep in the fine print,” according to consumer advocacy group. Don’t expect much of a discussion about fees on the websites where issuers promote them. Activation fees, which start at $3 and go as high as $40, and monthly fees of $3 to $10 are the hardest ones to avoid, according to Consumer Reports. But more avoidable fees for balance inquiries (at ATMs), card inactivity, paper statements (you can see your spending online or hold onto your receipts) and even customer service were common, too. “Look for the cost to load funds on and for per-usage fees,” says Wyman, who eventually found other budget-friendly solutions for his kids after tiring of these fees.
Depending on the individual card, you might not have the same protection you would if you lost a regular credit or debit card. Some but not all issuers will replace your balance. Also, while any store, restaurant, hotel, or gas station that takes major credit cards should take your prepaid version, it’s not always a straightforward transaction. For example, if you try to charge more than you have on your card, the store clerk won’t be able to tell you how much you’re short by—the card will just be rejected. You’ll have to try a smaller sum and pay the balance some other way (or put the item back if being short really means you’re over your budget).
Also, restaurants will often seek approval on credit cards for a little more than the bill actually is, to leave room for the tip you’ll presumably add when you sign the receipt. So if your dinner bill is $25, you’ll probably need at least $30 left on the card for the purchase to be approved. Similarly, Visa warns on its website that hotels will sometimes put a hold on a certain amount of money on your credit card until you check out, as a security deposit. This could leave the card short for other spending while you’re away.
Prepaid cards can be trickier to use and as laden with fees as other types of charge cards. But if you know the fine print going in and use them smartly, they can be a handy way to stay on a budget and avoid credit card balances without having to always carry cash.