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Why You Should Avoid Prepaid Cards

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Prepaid cards are widely considered to be a sensible alternative to using a bank-issued credit or debit card, especially for people who are unable to open bank accounts. With prepaid cards, there's no background check required, no interest to pay on the account balance, you can't exceed spending limits, and you don't need a bank account to get one. These cards are easy to use, and you can start using them as soon as you make the purchase. So what's the problem?

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Prepaid cards come with a slew of disadvantages, many of which are only visible to a consumer who makes a point to read the fine print. Here are a few of the drawbacks of opening a prepaid card.

Security may be compromised
When you find an erroneous charge on a bank statement associated with a financial institution, and then you report the fraudulent charge, the bank will typically issue back all or a portion of the money you lost. This doesn't necessarily hold true when it comes to prepaid cards. If your security is compromised and someone uses your prepaid card to make a fraudulent charge, the bank will likely not reimburse you.

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Another security issue with prepaid cards? Hackers. While it's also possible to hack into your bank-issued credit or debit accounts, prepaid cards have even fewer controls on them, which makes them easier to hack into and harder for banks to track.

No credit benefits
Many people prefer to avoid bank-issued credit cards out of fear that using them will result in substantial unpaid credit card debt and pricy interest charges. But for people who feel comfortable responsibly using and managing credit cards, using one is more beneficial than using its prepaid counterpart because it will help build credit over time.

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Overloaded with hidden fees
Prepaid cards are often laden with fees, so it's important to stay up to date on the terms and conditions of the card you choose. These include fees for activations, ATM withdrawals, reloading funds, monthly maintenance, inactivity, balance inquiries, and even customer service calls.

Sarah Kaufman is the editor-in-chief of the Manilla Blog at, the leading, free and secure service that helps you simplify and organize your daily life. Using just one password, Manilla lets you manage your finances, utilities, daily deals, travel and rewards programs, Netflix and magazine subscriptions, and more -- all through or the top-rated iOS and mobile apps. Sarah is also a regular contributor to Yahoo! Finance, Good Housekeeping, Woman's Day, The Jane Dough and other major sites. For more debt and credit tips, visit the Manilla Blog.

Read/Post Comments (4) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 28, 2013, at 4:58 PM, DevynC wrote:

    This article has made a lot of assumptions about prepaid cards that are not always true and certainly dependent upon circumstance. Breach of security, hidden fees, and running your credit into the ground are all valid fears, yes. However, for those unable to get a bank account, getting a prepaid card from your employer, can be a wonderful experience. As long as the employer who offers the card does their due diligence to make sure that the issues mentioned above are not realities. There are vendors who exceed security standards, guarantee FDIC insurance for funds, and have no room for "hidden fees" being in their vernacular. I know this because I happen to work for a vendor who follows that criteria. If anyone reading this article would like to get honest information on prepaid cards in the workplace, and has the ability to implement a paycard program at their organization, I would be happy to help.

  • Report this Comment On June 28, 2013, at 11:44 PM, 3offthecharts wrote:

    With all due respect, the author clearly states the primary reason for the use of prepaid cards in her first sentence. People who cannot open bank accounts, typically cannot obtain traditional credit cards either.

    While it would be wonderful if those of us who need to use prepaid cards could rely on the relative security of a bank credit card, the simple fact is that we cannot. Bank debit cards are also risky, subject to compromise-and if they are, you are not guaranteed to have your funds restored any time relevant to "quickly".

    People whose credit is already shot aren't necessarily worried about rebuilding it. In the light of recent credit tightening guidelines, they may not ever be given the opportunity. What they are worried about? Being able to make hotel, car rental reservations. Ordering items online. Some prepaid cards don't allow for the former, some do.

    While it is true that the fees are imposed on those of us who can least afford them, we have few alternatives. Perhaps the writer's efforts would be better spent on telling us what those might actually BE, as opposed to telling us why you think our current option is a bad idea.

  • Report this Comment On June 29, 2013, at 1:54 AM, stevenatorr wrote:

    they are all rip off's just like banks, i use 1 and load what i need on the card and after a month get a new card to avoid the $5 monthly fee and other hidden fee's. thats what america is all about, ripping off who we can as much as we can.

  • Report this Comment On June 29, 2013, at 4:35 AM, eartlk72 wrote:

    I have a well-known prepaid debit card. My girl friend has the same. I get my payroll loaded onto my card each week. I have had NO problems with it . Had it over a year with NO problems. There is a monthly fee, but VERY affordable. I will continue to use it for the foreseeable future.

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