5 things to know before getting a prepaid card

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5 things to know before getting a prepaid card

By DREW JAFFE

Prepaid debit cards have become a popular use of payment, with Americans charging $220 billion on them in 2014 alone.

Their appeal may not surprise you. Since you can only spend as much as you load onto the cards, they can be valuable budgeting tools. But before you rush off to get your own, here are a few things you should know.

1. Where you can use the prepaid card may depend on the type of card.

The locations that accept prepaid debit cards depend on the type of card. Broadly speaking, these cards fall into two categories: open-loop and closed-loop. Open-loop cards are usually identifiable by their network logo, such as Visa or MasterCard, and they can generally be used at any location that accepts those types of cards.

Closed-loop cards can only be used at a specific retailer or for a specific purpose. They're similar to transit cards, which you can only use to purchase bus, train or ferry rides.

2. You can usually reload them.

Luckily, you can generally use prepaid cards over and over again, as many issuers allow you to add money to your original balance. This can be done using a variety of methods, such as direct deposit or visiting a participating retailer or ATM. However, issuers sometimes charge a deposit fee, which may vary depending on how you choose to add money.

For example, if you have a Walmart MoneyCard, you can reload it for free using direct deposit from your paycheck or government benefits. However, if you reload using cash on the Green Dot network, you'll be a charged a fee of up to $4.95.

Visa, MasterCard and Chase all offer reloadable prepaid cards, although you'll want to check the card agreements to see what sort of fees may apply.

3. They can come with a variety of fees - and it may be difficult to find out how much these fees are.

Deposit fees aren't the only costs associated with prepaid cards. According to Consumer Reports, card providers can apply more than 10 different types of fees - and these can quickly add up.

Fees include, but aren't limited to, activation, monthly maintenance and cash-withdrawal fees. Some providers even charge you for merely inquiring about your balance. These fees aren't always listed on the packaging, either, so you may need to search for the fee schedule online or call the provider.

4. They aren't protected in the same way debit cards are.

Prepaid debit cards generally aren't covered by all the same fraud and liability laws as normal debit and credit cards. However, most major card providers have chosen to offer some protection against fraud, although it varies depending on the provider. Additionally, cards issued by banks may be backed by the Federal Deposit Insurance Corp.

It's important to keep in mind that prepaid debit cards and secured credit cards function differently.

Prepaid debit cards require you to load money onto them that will later be spent when you make a purchase.

With secured credit cards, you put up a certain amount of cash as collateral. You're still using credit. However, if you fail to make your payments, the creditor can take that cash as payment.

5. You can't build credit with a prepaid debit card.

You don't borrow money to make purchases with a prepaid debit card -- you're merely spending money you've already loaded onto the account. As a result, using this type of card usually won't improve your credit, since you're not demonstrating to creditors that you can repay money you've borrowed.

Those with shaky credit looking to build their score may want to consider signing up for a secured credit card, getting a co-signer on a credit card or loan, or asking to become an authorized user on someone else's card.

Bottom line

Although they won't help you build credit, prepaid debit cards can be a way to help avoid overspending. But they can also come with expensive hidden fees and less protection against fraud than a typical credit card, debit card or even a secured credit card. So before you buy one, do your research.

About the Author: Drew Jaffe currently attends Occidental College in Los Angeles, where you'll most likely find him cooped up in the media suite working on the latest issue of the school newspaper. When he's not working, he's most likely napping, eating burritos or hiking with friends.

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