The use of prepaid cards is on the rise and for good reason: Parents use them to shower their kids with allowance, family and friends exchange them as gifts during the holiday season, and those with poor credit are able to carry around plastic like the rest of the population. They provide a level of convenience that is unmatched by paper checks and cash, and people can use them at virtually any online or brick-and-mortar store that accepts regular credit and debit cards.
But like with many good things, prepaid cards come with a slew of disadvantages that consumers need to know. Before you purchase your plastic, educate yourself on the hidden dangers of prepaid cards.
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Laden with fees
Whether you’re buying a prepaid card for yourself or someone else, read the fine print. Usually the fees come in the form of a one-time “hit” upon purchase of the card, and then again if you want to withdraw funds from an ATM. Some companies may charge for even the simplest maintenance tasks, like reloading the card with money or checking your balance online.
Different cards have different fee structures, which means it’s important to shop around before choosing the prepaid card of your choice.
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If you have a regular debit card issued with a financial institution, and then that financial institution goes bankrupt, you and your money are protected by law. Institutions insured by the Federal Insurance Corporation (FDIC) are required by law to meet up to $100,000 worth in deposits for an individual account. But when it comes to prepaid cards, that doesn’t always hold true. In most cases, if you were to lose a prepaid card, you’d lose your money and the bank would not reimburse you. (Note: There are some cards that are FDIC-insured.)
To ensure you’re prepaid account is as protected as possible, only load the card with the amount you need plus 10 percent to cover the various fees that come with the card. Never load more on the card than you could afford to lose in the event that your card is lost or stolen. Keep your card in a safe place and regularly track the balance.
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Prepaid cards are actually more like debit cards — you load them with funds, which deplete as you make purchases, but you are not building your credit as you spend. This makes it useless as an aid to rebuilding your credit rating.
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