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Prepaid Cards Keep Your Budget Intact

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A growing number of Americans are using prepaid cards to help them stay on budget, while enjoying the flexibility of paying with plastic.

A prepaid card can help you stay within a predetermined spending limit, because you can only spend what you put on the card. If you’re someone who has over-drafted an account in the past, this strategy can be especially useful.

Another key advantage of prepaid cards is they can be used for purchases where cash is not an option, such as paying a bill online or booking a flight through a travel website. “This makes it more convenient and faster,” says Dara Duguay, executive director of the Credit Builders Alliance in Washington, D.C.

Here are some other key considerations to help you decide whether a prepaid card may be right for you.

How prepaid works

Using a prepaid card is very similar to using a credit or debit card. Prepaid cards are accepted at physical stores—such as grocery stores and gas stations—as well as for paying bills or making purchases online. Most prepaid cards are branded by one of the major card networks, such as MasterCard, so they can be used everywhere the brand is accepted worldwide.

Prepaid cards may look like credit cards, but there are some important differences. First, unlike a credit card where you borrow against a line of credit, with a prepaid card you load your own money onto the card and draw down your balance. Second, prepaid cards enable you to make cash withdrawals from ATM machines. Third, activity on prepaid cards is not reported to the credit bureaus, so your card activity is not reflected on your credit report.

As your funds get low, you can reload. Options for reloading vary by card, but most let you add funds online; with cash at the issuer, such as a bank; at the places you already shop, like grocery and convenience stores; or via direct deposit straight onto your card. Some employers will even load some or all of your earnings onto a prepaid card.

What to look for

When assessing a prepaid card, the first thing to look for is the type of monthly fees the issuer charges, Duguay says. For example, some issuers may charge inactivity fees if you don’t use your card very often. You’ll also want to check which ATM network the card is connected to in order to avoid higher out-of-network fees, Duguay says.

Additionally, it’s good to know if certain choices—such as where you reload your card—can eliminate or reduce certain fees.

Consumer Action, a nonprofit consumer advocacy organization, suggests checking these key points when looking at prepaid cards. Does the card offer:

  • Online or telephone bill payments at low or no cost
  • Protections against fraud and billing disputes
  • Free budgeting and monitoring tools that include live customer service 24/7, email and text alerts, real-time transaction history online and a free summary of your spending

The Consumer Financial Protection Bureau says that if a bank issued your prepaid card, you may have some amount of Federal Deposit Insurance Corporation (FDIC) insurance. If the issuer is not a bank, you should look at the issuer’s rules to see if you are protected.

When considering whether a prepaid card is right for you, you’ll want to learn how different prepaid cards work and the advantages and disadvantages of each by calling or visiting your bank.

To learn more about specific prepaid cards, Duguay recommends visiting the Consumer Action website.

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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