Prepaid Cards

Prepaid cards, or stored value cards, are a popular way to pay (and even get paid) without using cash. If you've ever used a gift card, you've used a prepaid card.

There are three main types of prepaid cards:

• Payroll cards and government disbursement cards. Employers and government agencies use these cards to pay wages and other benefits instead of issuing checks. They are often considered a safer, more efficient way to distribute benefits since the money is available right away without needing to cash a check.

• General-purpose reloadable cards. Available for purchase from many retailers and online, these cards can be used like a typical MasterCard or Visa. They come with a set dollar amount assigned to the card and allow you to add money to the card later. These cards offer more flexibility and can be a useful budgeting tool.

• Gift cards. These cards are purchased in fixed amounts and can only be redeemed for purchases from the particular business that issued them.

Benefits of Prepaid Cards

A significant benefit of prepaid cards is that they allow you to make purchases without cash. And since there's no credit involved, it's impossible to go into debt or incur over-the-limit fees. If you try to spend more than the balance, the purchase is simply declined.

For those without bank or credit union accounts, getting paid with these cards avoids expensive check cashing charges. Some people also use prepaid cards as a budgeting tool, loading a set monthly amount for discretionary spending.

Further, many prepaid cards can now be linked to mobile payment apps like Apple Pay, Google Pay, or Samsung Pay. This integration allows even more convenient use of prepaid funds, enabling contactless payments and easy balance checks through smartphone apps.

Potential Disadvantages of Prepaid Cards

Despite the benefits and increased protections, prepaid cards still have some disadvantages compared with credit and debit cards:

• Fees - Unless you're receiving money with a prepaid card, the fees you'll pay can add up quickly. There could be card purchase fees, fees for adding money, checking your balance, or withdrawing cash at an ATM, and even a monthly fee whether or not the card is used. Over a month, the fees on a $100 balance could take a significant percentage of the card balance.

• Limited Consumer Protections - While the CFPB rules have improved consumer protections, prepaid cards may still not offer the same level of consumer protection as credit and debit cards, which are required by law. For example, if you have a dispute with a merchant about an item that wasn't received or wasn't as advertised, you may have limited recourse.

• No Credit Building - Prepaid cards don't allow you to build (or rebuild) your credit history since no credit is involved. If you've had credit problems, a secured credit card may help you reach your long-term financial goals faster and be a better option for day-to-day spending.

• Potential for Loss - Some prepaid cards can be like cash in more ways than one. For example, if you lose your card, you may not be able to cancel it and be refunded the balance (capabilities vary from card to card). However, any credit or debit card can be canceled with a phone call.

Using Prepaid Cards for Budgeting

Despite these potential disadvantages, prepaid cards can be an effective budgeting tool for some people. By loading a set amount onto a prepaid card each month for discretionary spending, you can easily track and limit your spending in specific categories. This can be particularly useful for those trying to stick to a strict budget or curb overspending in certain areas.

Consumer Financial Protection Bureau (CFPB) Prepaid Card Rules

In 2019, the CFPB implemented new rules to provide additional protections for consumers using prepaid cards. These rules include:

• Free and easy access to account information.
• Error resolution rights.
• Fraud and lost-card protection.
• Upfront fee disclosures.
• Limits on overdraft fees and features.

These protections have made prepaid cards a safer and more transparent payment option for consumers.

Choosing the Right Prepaid Card

If a prepaid card is the best option for you, understand your rights under the card agreement and the CFPB rules. It's also best to use a prepaid card that:

• Requires a PIN to make purchases.
• Allows you to sign up for an online account to check your balance.
• Offers mobile app integration for easy management and mobile payments.
• Has clear fee disclosures and minimal fees.
• Provides FDIC insurance on your funds.

These features will provide increased security and convenience - and will likely allow you to cancel the card if it's lost or stolen.

Overall, prepaid cards make sense for specific situations, but a debit or ATM card is safer and less expensive for everyday spending. Always consider your financial situation and needs when choosing any financial product.