The use of prepaid cards continues to grow at a healthy clip. There are many good reasons to use them. There are also many misconceptions that have bred a sort of myth of prepaid cards’ ability to do things that they can’t do, like build credit.
Prepaid cards have been the mechanism by which people who are the most financially marginalized can gain access to what was otherwise inaccessible: a form of payment other than cold, hard cash. Having a marginalized population gravitate toward a specific product leads to the potential for abuse, or at least misdirection and misleading information.
The current trend in the prepaid market is outside the market’s historical mainstay of serving the poor. Continued growth in technology has furthered the features and conveniences available with prepaid cards, and the market has seen a lot of growth in newer ways to use these vehicles.
What Are Prepaid Cards, and How Do They Work?
Prepaid cards are a virtual account in which you store money that you can access through a card that appears to be a credit card. However, it is technically a debit card, as it allows you to spend your own money, not the issuers’.
Whether issued by banks or other institutions, prepaid cards use one of the transaction networks, such as Visa or MasterCard. American Express is also a large player in the prepaid market. You pay for goods or services, just as if you were using a credit card, but you’re limited to the funds you have on deposit. Most cards can be reloaded — you add funds whenever you choose — and some can be loaded by direct deposit. They have become a common way to receive government benefits.
Prepaid cards can be an alternative to banking. This use has been responsible for much of the market’s growth, especially in its earlier years.
Some people can’t open bank accounts because of a negative financial history. Some people simply choose to avoid having a bank account. They do so for a range of reasons, from the simple fear of financial institutions to the desire to shelter assets from creditors.
For others, banking is just plain inconvenient. At its most fundamental level, it requires going to a bank. If you have transportation challenges, then you are more likely to have banking challenges.
New Directions for Prepaid Cards
Technology has opened new directions for the use of prepaid cards. In addition to funding through direct deposit, many cards offer online bill payment; online account management, including reloading; and other features. You may also get additional protections from either the issuer or the network, thus reducing or eliminating your liability for loss. This gives you virtual protection in addition to the physical protection of not carrying cash.
The False Mantra of Building Credit
Unfortunately, there are unscrupulous individuals who market prepaid cards as a way to build credit. But they are not. Generally, the savviest of these individuals don’t actually say the card will build credit. Instead, they indicate that this might happen in the future, and that your history of using the card might help. Then again, you might win the lottery or have some heretofore unknown wealthy relative die and leave you set for life. Of these three scenarios — building credit with prepaid cards, winning the lottery, and becoming fabulously wealthy as a result of random circumstances — the first is the least likely.
Secured credit cards are different than prepaid cards in that they can and do build your credit. A secured credit card is a real credit card, guaranteed by a deposit of your money held by the institution that issued you the card. This is very different than a prepaid card, which is a debit (not a credit) card. Use a secured card to build credit? Absolutely. Use a prepaid card to build credit? Nope — it doesn’t work. Don’t do it. You’re being lied to.
The Sensible Use of Prepaid Cards
Prepaid cards can make a lot of sense. There are many positive ways to use them. They can be employed as an alternative to banking, as mentioned above. They can offer purchase protections and the physical safety of being cashless while still having cashlike convenience.
You can also use prepaid cards as budgeting tools. Some people use them to limit spending in a particular budget category, such as grocery shopping. They load a prepaid card with their monthly grocery allowance, and knowing that this is all they have for that period of time, they plan their purchases and avoid impulse items that could derail their budget.
The expansion of uses and features makes prepaid cards attractive for online purchases and other traditional uses for credit cards. And if someone gets ahold of your number, they can’t ruin your credit.
Beware of Costs and Fees
Prepaid cards are not subject to the same consumer protection and disclosure laws that credit cards are. Some prepaid cards are very inexpensive, while others are quite costly. Be wary of high monthly fees and reloading charges. Many of these cards began as an alternative to banking for poor or marginalized populations, and the issuers took advantage of the consumers’ lack of financial know-how and alternatives. People were using them to avoid the high costs of check-cashing services and payday loans, so they were willing to pay a lot. But you don’t have to in today’s market.
Shop around. Features vary widely, so if you want to be able to make recurring payments online or to have other specific features, it’s important to comparison shop. Some cards offer a lot for a little, but watch out for those that give little and take a lot.
The prepaid market has shifted because of technology. It is no longer only the poor or unbanked who can gain from using prepaid cards. While not everyone can benefit, the options are far more expansive than they were just a short time ago. Prepaid cards are still an attractive choice for those who remain unbanked. But with increased options and features, they have something to offer to a far larger segment of the population than they once did. But they ain’t gonna build your credit.
The opinions expressed in this article are those of the author alone and do not necessarily reflect the official policy or views of CentSai Inc.