Use of reloadable prepaid cards — which can be used like credit and debit cards yet require no bank account or credit check — is surging. But the cards have a variety of drawbacks to consider.
Fees: Reloadable prepaid cards can come with a confusing array of fees — for activation, monthly maintenance, transactions, ATM withdrawals, balance inquiries, customer service calls, adding money to the card, inactivity and more. Each card’s fees are different, so be sure to read the fine print.
Limited protections: Prepaid cards are not covered by the laws that protect credit and debit cards in case of billing errors. There also are not the same legal consumer protections against losses caused by hacking. Most prepaid issuers do offer “zero liability” protection to users, but nonprofit advocacy group Consumer Action found these policies to be weaker than credit/debit card legal protections.
Credit scores: Although some people believe that using prepaid cards will help build a positive credit rating, it won’t. That’s because you’re not borrowing money, Consumer Action said. “Prepaid transactions are not included in any of the credit reports provided by the three major national credit reporting bureaus,” the group stated.
Telephone service: Getting help over the phone from some prepaid card companies can be difficult, and if you don’t already have an account it might be impossible, Consumer Action found. However, the group’s research found that American Express, Mango, OneWest, Yap and Western Union provided superior phone service for their prepaid cards.
Fund holds: When you use a prepaid card at a gas station, a hold of as much as $75 might be placed on your account, Consumer Action said. Similarly, if you use your card to guarantee a hotel room, a hold may be placed on funds paid into the account at least for a few days.