Tens of millions of Americans don't have access to checking accounts or credit cards, which can make it difficult for them to cash their payroll or government-provided benefit checks, pay bills, withdraw cash and shop online or by phone. It also forces many to carry large amounts of cash and to utilize extremely expensive check-cashing services.
An increasingly popular alternative known as prepaid cards has helped fill this void. Prepaid cards look and work much like debit cards, except that instead of drawing money from a checking or savings account balance, they are funded by money deposited into an account by cash, check, funds transfer or direct deposit by an employer or government entity.
Prepaid cards share many of the attributes and advantages of debit cards, including:
- They're safer to carry than large amounts of cash
- If branded with a logo like Visa, they can be used anywhere that brand is accepted
- Spending is limited to the amount in the account, helping keep debt in check
- Many can be used to withdraw cash from ATMs or to make online or phone purchases
- Many are covered by Zero Liability protection if lost or stolen
Among the more common types of prepaid cards are:
- Reloadable cards – to which more money can later be added
- Gift cards – which can be used until their balance is depleted; gift cards are not reloadable
- Teen cards – where parents can reload the cards and monitor purchases online or by phone (allowing teens a chance to manage spending and budgeting in a controlled environment)
- Travel cards – which offer a safe alternative to cash and travelers checks
- Payroll cards – where your pay is loaded into the card's account for immediate access (similar to checking account direct deposit)
- Government agency-provided cards – where benefits such as Social Security, unemployment and child support payments are loaded into your card account
- Flexible Spending Account (FSA) cards – where your eligible expenses are deducted from your FSA account balance at the point of service, eliminating the need to pay cash up front and submit reimbursement forms
Certain fees and restrictions may apply, so it's important to read the card's terms and conditions carefully. Here are a few questions you may want to ask when comparing cards:
- What identification do I need to obtain this card?
- Where can I use it? (Certain retailers only? Online? Phone?)
- Can I add funds to it later? If so, how?
- Is there an expiration date?
- Will I receive monthly statements and is there a charge?
- Can I check balances by phone or online?
- What, if any, fees are charged to activate the card, add funds, check balances, make ATM or bank withdrawals, for monthly service or for not using the card regularly?
- What happens if it's lost or stolen?
It's important to remember that you need to manage prepaid cards just as you would cash in the bank, by avoiding spending what you can't afford. To learn more about prepaid cards, check out the brochure prepared by Practical Money Skills for Life, Visa Inc.'s free personal financial management site (www.practicalmoneyskills.com/consumers/prepaid).
For those people who don't have access to a traditional bank account, prepaid cards can be a helpful financial management tool, when used properly.