If you struggle to obtain a credit card or simply want to restrict your spending to what you actually earn, a prepaid card can be a great option. It allows you to carry your digital money and will help save you from getting into debt. However, if you dig a little deeper, you will find out that things are not as rosy as they seem.There are many important aspects to consider before signing up for a prepaid card. Here are five things to watch out for that will help you understand whether they are worth it for you and your finances.
- Be Aware of Fees. Studies revealed that a prepaid card will charge up to $300 in fees each year. Typically, these include monthly service charges, reloading fees, and ATM fees. Along with these basic charges, many prepaid cards feature hidden fees, like activation fees, bill payment fees, transaction fees, inactivity fees, and paper statement fees. You might come across prepaid cards with fewer and lower fees, but getting a traditional checking account is still more beneficial in terms of costs and transparency.
- It Won’t Help You Build or Improve Credit History. Prepaid cards were originally created for individuals with credit issues or those who don’t have a credit history at all because it’s impossible to overspend with these cards and run into debt. The downside of a prepaid card, however, is that it’s only a short-term solution and won’t allow you to build a positive credit history. The transactions on prepaid cards are not tracked by credit reporting agencies, meaning there is no way you can earn credibility. Prepaid cards can still offer you a little help when you’re trying to recover from debts, but to really recover your finances, they are not a long-term solution.
- They Offer No Protection. Although prepaid cards look exactly like their debit counterparts, they are not the same. The former lack many vital features, including protection. While a debit card tied to a bank account ensures loss coverage in certain cases (fraudulent transactions, data theft, error, etc.), things are different with prepaid cards. Some issuers include protection against fraudulent operations, but this is voluntary. It means that they can change their mind any minute and you won’t get any mechanism to safeguard your hard-earned money.
- Vulnerable to Scam. Since funds stored on your prepaid card are not insured, you may become a victim of fraud. The number of fraudulent schemes to steal your money has been increasingly growing from year to year. The notorious Nigerian 419 scam, flash attacks, deceptive marketing scams, utility frauds – these are only a few tricks culprits use to clear your account. And the majority of prepaid card issuers can’t protect their clients from these shady tactics.
- Little or No Perks. Banks lure new clients into getting a credit card by offering them various benefits. Cashback, purchase protection, global or roadside assistance (in case you require help to solve legal issues abroad or need to get your car towed or fixed), convenient apps, free text notifications, you name it. When it comes to prepaid cards, however, you may discover that your issuer has attached little to no perks whatsoever. While you’ll probably get access to an app or online client to manage your account, there is little hope that you can get more than that.
So while a prepaid card may be a decent alternative to a debit card, they have some major drawbacks as well. Consider all the above-mentioned facts before deciding whether a prepaid card is the best option for you.