The popularity of prepaid debit and credit cards is growing fast. On the surface, they seem like a good idea, right? You’re not using credit to purchase things so you’re not spending beyond your means.
While prepaid cards offer a good alternative to using credit, there are a number of things to consider.
“When it comes to trying to stick to a budget, living a cash-only lifestyle is best. However, there are circumstances where using a credit card (or a debit card) is more convenient or in some cases required. In this way, prepaid cards can be a great alternative to traditional credit,” says Jeff Schwartz, executive director, Consolidated Credit Canada.
“There are still a number of points to consider, like some of the fine print and if the use of these cards are in support of your longer term goals,” says Schwartz.
Prepaid Cards Pros & Cons
Pro: Budgeting tool
Doing online shopping and booking flights; hotels and cars can be tough without using a credit card. But what if you really want to avoid credit use? A prepaid card will help you get around that, so that is a convenient benefit. However, you will want to make sure that there is enough funds on the card for the purchase or that the retailer will allow their use.
Pro: Great to help family
Let’s say you have a child away at school who needs money or a senior parent who could potentially be vulnerable to scams. Supplying them with a prepaid card gives them the autonomy to spend without a lot of the potential danger of letting them have a traditional card.
There is a lot of safety around prepaid cards. For instance, when you travel you won’t worry about a financial breach. Your personal credit card information is safe. A prepaid card is a good option to combat online identity theft. However, you don’t have liability protection in the same way that you do for a traditional credit card.
If your prepaid card is stolen, it’s gone. There is no way to recover funds or replace the stolen card.
Con: Not helpful for your credit history
While prepaid cards are great in the sense that they are available to people with no credit history or a poor credit history, they ultimately aren’t doing anything to help you change that; they don’t establish credit history. The only way that you can clean up your credit (or prove yourself in the first place) is to consistently use and make your payments each and every month.
If your goal is to establish credit, your goal may be better served by taking out a credit card. Keep a small balance card, make small purchases you will be able to pay off in full every month. If you are a high-risk borrower, your lender may even agree to give you a credit card if you secure it with cash. That way you are establishing credit, but also have cash should you need to shut down the card and pay it off.
Con: Be aware of the fees
Another drawback is that a number of cards have pretty substantial fees, like activation and per-use fees, which can really eat away at your balance. In the end, you need to make very sure that you’ve read all the fine print in detail before you purchase.