Prepaid Cards Are a Smart Way to Pay With Plastic
If a $100 bill had a love child with a credit card, their progeny could very well be a prepaid card—a money tool that combines the ease and versatility of plastic with the freedom from fees of cash.
Not that long ago, prepaid cards were a fee-laden payment method of last resort for people without credit cards or bank accounts. In fact, in 2010, we did not recommend them because of their high fees and inadequate consumer protections. But now, thanks in part to advocacy work by Consumer Reports and other consumer groups, many of the cards have affordable fees (or none at all) and voluntarily offer the same consumer protections as debit cards, including Federal Deposit Insurance Corp. coverage on balances and no liability if they’re lost or stolen.
In simplest terms, a prepaid card is like a debit card that is not tied to your bank account: You preload it with funds and add more as needed. You can purchase one for a few dollars in most supermarkets and drugstores and at many retailers, and begin using it as soon as you give a cashier the amount of money you want loaded onto it. (You should also register the card online or by phone, in case it’s lost.) They can also be purchased online.
You can use the cards anywhere credit or debit cards are accepted. More than 12 million merchants accept prepaid cards with the MasterCard or Visa logo; 3.4 million take American Express-brand cards. The Bluebird and Green Dot cards provide fee-free cash withdrawals at more than 24,000 MoneyPass ATMs, and Liquid cards allow no-fee withdrawals at 15,500 Chase ATMs.
You generally can’t spend more than you’ve put on the card, but if you do, there is usually no overdraft fee. (None of our top-rated cards charge that penalty.) Prepaid cards will also help you to:
Stick to a budget. To impose some fiscal discipline on yourself, open separate card accounts for various categories of expenses, such as groceries, clothing, and holiday gifts, each loaded with the amount you budget for that category. (You can monitor your spending online or with the card’s mobile app.) Look for those that don’t charge a monthly fee (Bluebird and the H&R Block Emerald cards are options).
Do away with debt. Prepaid cards don’t provide credit, so they keep you from spending money you don’t have.
Control kids’ spending. Parents can give teens or college students prepaid cards instead of credit or debit cards to keep them from breaking the bank. If they lose the card, you’re exposed to less risk because it’s not tied to your bank account. The Bluebird and American Express Serve cards allow the primary cardholder to create up to four subaccounts—each of which gets its own card and balance—at no extra cost.
Protect seniors from scams. Fraudsters steal an estimated $30 billion each year from unsuspecting consumers, including the elderly. Seniors can guard against that by using a prepaid card. Or adult children or other caregivers can give a senior family member a prepaid card, which offers him or her the dignity of control over spending while allowing a responsible party to keep an eye on things. Certain cards, including Serve, allow you to limit transaction amounts, permit or prevent online purchases, and block purchases from international merchants to thwart scam artists overseas. The True Link Prepaid Visa, which we did not rate and which has a $10 monthly fee, is designed specifically to protect seniors from fraud. It allows you to block certain purchases, such as over-the-phone sales from scammers.
Give a better gift card. The problem with most gift cards is that they’re good at only one retailer. But prepaid cards can be used anywhere that American Express, MasterCard, or Visa is accepted—whether in a physical store or online—and they come with more protections than gift cards, in case they’re lost or stolen.
Avoid ATM and other banking fees. Many prepaid cards give you access to a nationwide network of thousands of fee-free ATMs and the ability to monitor transactions online or by mobile app, to load more money free of charge via direct deposit, and to pay bills online. With some, you can even write paper checks.
Caveats and Cautions
But for all of their advantages, prepaid cards are not without drawbacks. You won’t earn interest on the money you keep on the card, and unlike a credit card, a prepaid card won’t help build your credit history. Certain prepaid cards, including RushCard and Walmart MoneyCard, have experienced short-term technical failures that prevented users from accessing their money or account info.
Car rental companies including Avis and Hertz don’t accept prepaid cards as security, so you’ll still need a credit or debit card to drive off the lot. (You can pay for the rental with your prepaid card once you return the car.) Similarly, gas stations can put a hefty hold on the card for several days if you swipe at the pump—but you can avoid that by paying inside before you fill up. Certain hotels and other merchants also impose holds.
New regulations expected later this year from the Consumer Financial Protection Bureau are likely to extend consumer protections to all prepaid cards. But until those rules are in place, stick with the top-rated cards on our list. They all provide FDIC insurance and don’t hold customers liable for errors such as inaccurate debit entries and unauthorized charges due to fraud.
Editor's Note: This article also appeared in the September 2016 issue of Consumer Reports magazine.
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