Prepaid credit cards: More harm than good?

Why using general purpose prepaid cards can cost you

Prepaid credit cards are marketed as the perfect solution for credit-crunched consumers; not only are they convenient, but being approved for one isn't a problem (after all, they areprepaid) - even for those without any established credit history or those with a heavy debt load.

However, remember that age-old adage: if it sounds too good to be true, it probably is. While a prepaid general use card may seem like a sound financial solution to many situations that require credit, the exact opposite is often the case.

Indeed, don't let yourself be fooled by this credit card look-a-like. While many general use cards bear the emblem of brands like Visa or MasterCard, this isn't your average plastic. Before you start stuffing stockings with prepaid cards this holiday season, consider the following misconceptions about this popular product:

1. Prepaid credit cards are universally accepted

Many consumers assume that prepaid credit cards are valid wherever major credit cards are accepted. Unfortunately, that's not always true. Take a closer look at your prepaid plastic. If it features the phrase 'Electronic Use Only' you won't be able to use it at merchants that use a manual imprinting machine to process transactions.

What's more, domestic prepaid cards are only valid in Canada (look for the phrase 'Valid only in Canada'). If you're giving a prepaid card to someone who is about to embark on a vacation, make sure you purchase one that is redeemable worldwide. Similarly, some prepaid card companies don't allow their cards to be used at casinos or on cruises. Check with the card issuer in order to better understand the restrictions on your general use card.

2. Prepaid credit cards are fee-free

This simply isn't the case. First, most prepaid cards come with an activation fee of about $3.99 (or more). They also feature a per-transaction charge (often around $0.39 per transaction) and a monthly service fee (this usually comes into effect after six months of having the card). When all is said and done, costs can easily surpass 20 percent for a $25 prepaid card.

With this in mind, consumers need to carefully compare all expenses and fees before deciding whether it makes financial sense (or cents!) to invest in a prepaid card.

3. Prepaid cards can help improve your credit score

Claims that prepaid cards can improve your credit rating amount to nothing short of false advertising, according to the Financial Consumer Agency of Canada. General use cards are considered “non-credit” products. As such, purchases made on prepaid cards don't directly boost credit scores. With that said, a prepaid credit card can help you to stay within a pre-set cash budget, which can help enforce more disciplined spending habits.

4. Prepaid credit cards never expire

Wrong again. Check the back of your general use credit card closely. Almost all of these products feature an expiry date. If you fail to use your card before the expiry date, any amount on the card may be automatically lost.

Note: New rules are being implemented by the federal government in order to do away with prepaid credit card expiry dates. Canadian Finance Minister Jim Flaherty announced new rules for the largely unregulated prepaid credit card market in October. New regulations will require an information box on product packaging disclosing any fees associated with the card, as well as the dismissal of any expiration date.

5. Lost or stolen prepaid cards are protected

This is partially true. Consumers who register their prepaid cards with customer service can normally request a replacement card if ever they were to misplace theirs. Unused balances are simply transferred to the new, re-issued card.

Of course, with convenience comes a fee. Replacements will often cost anywhere from $10 to $20, easily erasing any transferable value. Furthermore, no reimbursement is made available for amounts that may have been spent before the issuer was notified of the misplaced card. Finally, in order to report a missing general use card, you must be able to provide the issuer with your card number. Don't have a record of that number? Oh well!

What to ask yourself when considering a prepaid card

If you're thinking about picking up a prepaid credit card for yourself or a friend, make sure to stop and ask yourself the following questions:

• Is there an activation fee attached to this card? Is it worth more than five percent of the card's value?
• What are the terms and conditions of the card?
• What are the fees associated with the card? Make sure to check for activation fees, transaction fees, customer service fees, monthly maintenance fees, etc.
• Does your card have an expiry date?
• What happens if your card is misplaced? Can it be reissued and at what cost?
• Where is the card accepted?

Read the fine print

While prepaid credit cards are the fastest growing non-cash method of payment in the United States, according to the Federal Reserve, this doesn’t necessarily mean they're the best credit alternative. Remember to read the small print before you start lining your wallet with this new form of plastic. A little research could help you to avoid astronomical fees that chip away at the true value of this type of card...spending within your means.

From Goldendgirlfinance.ca/ Posted by Mags