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The Pros and Cons of Prepaid Cards

Are you using a prepaid card for convenience or necessity? Understand the benefits and drawbacks of prepaid debit cards and whether they can affect your credit score.

The Pros and Cons of Prepaid Cards

Prepaid cards are becoming extremely popular. Globally, nearly $15 billion is expected to be spent on prepaid cards in 2022, and the number is growing. They are accepted online and anywhere standard, credit cards are accepted, making them a sought-after alternative to cash.

How exactly do prepaid cards work, and why are so many people using them? Before you get a prepaid card, understand the advantages and disadvantages to determine whether they are right for you.

What is a Prepaid Card?

Prepaid cards, also called prepaid debit cards, reloadable cards, or stored-value cards, offer another option for buying goods or services. The cards look like traditional credit cards and are often backed by Visa or Mastercard, but work like debit cards. You buy a card preloaded with a set amount of money which you can spend at merchant locations. Unlike a credit card, you cannot spend more than is available on the card, and there is no bill to pay later.

You can buy prepaid debit cards online and at nearly any grocery or convenience store. You may also receive prepaid cards as a gift, for Social Security or other government benefits, or as employment pay. Prepaid cards are reloadable.

Make sure to distinguish prepaid cards from gift cards explicitly issued for one retailer.

Advantages of Using Prepaid Cards

Here are a few of the reasons prepaid cards are gaining popularity.

Poor credit is not a problem. No one will scrutinize your credit report when you purchase a prepaid card. Your credit history does not matter because there are no payments, and the card providers take no risk.

No bank account, no problem. Your card is like a bank account financed by the preloaded amount. Adults who cannot or choose not to open a checking or savings account turn to prepaid cards as an alternative to paying bills by check. You can also withdraw cash at ATMs.

Prepaid cards are safe and convenient. Use prepaid cards instead of cash for purchases at most merchants. Once you register your prepaid card, the provider is required under Consumer Financial Protection Bureau provisions to offer protection in case of loss or theft.

Easily track your spending. Prepaid cards can help people who have difficulty managing their personal finances get their spending under control. Card providers offer services to allow you to track and monitor your spending, like traditional financial institutions. Depending on your card issuer, you may be able to check your card balance and card activity via a mobile app, online, or through a phone service.

Disadvantages of Prepaid Cards

There are only a few downsides to using prepaid cards, but they are significant.

Prepaid cards come with fees. Cardholders may have a lot of fees, including activation fees, transaction fees, ATM withdrawal fees, reloading fees, monthly fees, or inactivity fees. Check the fine print on the card for fee types. On the flip side, switching to a prepaid card could save you money if you continually overspend a checking account and are hit with hefty overdraft fees.

Prepaid cards cannot increase your credit score.  Credit bureaus do not report transaction information. As such, they cannot help you build or rebuild your credit history.

Rebuild Credit with the Secure Card from TDECU

A TDECU-secured credit card helps you rebuild your credit. You can get a credit card backed by cash with as little as a $200 deposit. The transactions are reported to credit reporting agencies, helping you improve your credit score.

TDECU also offers credit cards designed for those looking to establish credit. We help make it easy with low, competitive rates, no annual fees, and payment protection.

TDECU Credit Cards for All Your Needs

TDECU offers credit cards for every need and stage of life.

Find out how TDECU can help you find the right type of card to meet your needs. Learn more about your options today.