The following is a guest post, via Money Supermarket
A prepaid card is like a cross between credit cards and debit cards. You make an initial deposit to load the card with a specific amount of money and then you reload the card when the balance runs low. Once thought to be a spending tool only for the financially challenged, these cards are becoming an increasingly popular way to make purchases without running up credit card balances or tapping into bank accounts. Prepaid cards have several advantages and disadvantages.
One advantage to these prepaid cards is that consumers don’t have to qualify for a checking account. You also don’t have to undergo a credit check because you can purchase these cards at a number of retail stores.
A prepaid card can help you manage your finances by limiting your spending. You don’t have to worry about going over your budget because you can only spend up to the amount that you’ve already loaded on your card. Having one of these cards can be an easy way to curb impulse shopping habits.
If your prepaid card gets lost or stolen, at least you’ll only lose a limited amount of funds. Prepaid cards also come in handy when you’re making purchases that might otherwise auto-renew, such as magazine subscriptions and membership fees. You can also use these cards for online purchases without having to reveal personal or financial information.
Despite all of those benefits, prepaid cards have their drawbacks as well. Hidden fees often lurk in the fine print. Card companies often charge activation fees, ATM fees and a surcharge for every purchase. Some companies also charge monthly maintenance fees, dormancy fees and inquiry fees. If you add up all of the high fees, a prepaid card might turn out to be one very expensive way to bank.
The prepaid card industry is relatively young, so it isn’t scrutinized like the credit card industry. This means that few regulatory measures are in place to protect you if your card is lost or stolen. Although some prepaid card companies offer customers “zero liability”, most of the companies do not. Unlike credit cards, using a prepaid card doesn’t allow you to build a good credit history. None of your deposit or purchasing activity is reported to any of the credit bureaus.
The money you use to fund your prepaid card isn’t covered with any type of insurance. If the card company declares bankruptcy or shuts its doors, you might be out of pocket for whatever balance remains on your card.
If you decide that the advantages of using a prepaid card outweigh the disadvantages, search around for the card with the lowest fees. Keep track of your balance to make sure there aren’t any surprise fees hidden in the fine print. Sometimes, these hidden fees will eat up any available balance, leaving you with nothing left on your card.