Image Credit: Getty Images
Prepaid credit cards often fall forgotten behind debit cards and credit cards. A lot of this probably has to do with the fees associated with them.
You get charged for loading and reloading a prepaid card as well as withdrawing money through an ATM. Some even charge monthly service fees. On top of that, prepaid cards don’t fall under the same regulations as debit and credit cards, so historically, they haven’t had to disclose their fees as clearly as their more regulated counterparts. Luckily, the Consumer Financial Protection Bureau did recently extend regulations requiring prepaid cards to disclose their fees in a more upfront manner.
Despite these drawbacks, there are a number of circumstances in which using a prepaid credit card makes a lot of sense.
1. For creative budgeting help
The foundation of a good budget lies in separating out your costs carefully, setting realistic spending limits, and then sticking to them. You might have heard about the popular cash-in-envelope budgeting method, which works by letting you spend only cash which you split up into different envelopes labeled for different expenses, such as “groceries” and “entertainment.” When you leave the house, you take only one envelope with you depending on the errand you’re running, and you spend only what’s inside of it. No card allowed.
Prepaid cards allow you to do this without having to deal with taking out and carrying around a bunch of cash. Get several different prepaid cards, label them each with a spending category, and only load them up with your monthly or weekly allowance in that spending category. When you go to the grocery store, only take your “groceries” card, and leave the rest at home.
2. To earn credit card rewards
One of the drawbacks of prepaid credit cards is that they don’t offer any rewards. However, they can be used to help you earn more cash back or points on your rewards credit card.
Many rewards credit cards work with a system of bonus spending categories. These cards offer additional rewards for spending on certain categories. For example, you might get 1 point per $1 or 1% cash back on regular purchases but 5 points per $1 or 5% cash back on purchases at grocery stores. Take advantage of this bonus spending category by purchasing prepaid cards at grocery stores, earning the bonus reward rate, and then using those prepaid cards on your regular purchases.
You can also use prepaid cards to help you win sign-up bonuses. Credit card welcome bonuses offer a generous amount of bonus points or cash back, but only if you can spend a certain amount within the first three months. If you’re having trouble meeting this minimum spending requirement, purchase prepaid cards to use in the future. Just make sure you can still pay off your credit card bill in full.
3. For international travel
Carrying a lot of cash while you’re abroad is risky business, as there’s almost no recourse if you happen to be robbed. While travel credit cards offer great protections and rewards, some are worried about giving thieves access to a high credit limit. A stolen debit card, on the other hand, gives them access to your bank account.
That’s why prepaid cards can be a great option for people who are worried about traveling with cash, credit, or debit. If a prepaid card is stolen, they’re only getting the amount of money that’s loaded onto it, nothing else. Furthermore, they can’t get access to your personal information. Travel-specific prepaid cards will even let you load multiple currencies onto the same card, saving you money on exchange fees. Make sure to check the foreign transaction fees and ATM fees before using a prepaid card abroad.
4. To give money to your kids
This is one of the most popular ways to use prepaid credit cards. They’re a great way to give your kids an allowance or emergency fund without having them carry around a bunch of cash. They won’t have to deal with the responsibility of owning a checking account or the risks of credit card debt. This also prevents parents from having to open up joint bank accounts or co-sign with their children, which can impact their credit.
It’s particularly common for parents to use prepaid cards to give their kids occasional money when they’re away at college. That being said, once your student is an adult, you should consider getting them a real bank account and perhaps even a low limit credit card or a student credit card. This will help them build responsible financial habits and a credit score early on.
5. When you can’t get a bank account
Finally, if you’re unable to open a checking account, a prepaid card is a solid alternative. You don’t have to have a great credit score to open a bank account -- in fact, some banks don’t even check your credit score and instead require a minimum deposit.
What they will check is your ChexSystems report, which details your history with checking accounts from banks and credit unions. Any seriously delinquent marks, such as unpaid negative balances, abuse of overdraft privileges, and evidence of fraud, make it difficult, if not impossible, to open a new checking account. This is also the case for people who have joint accounts with someone who left the account unpaid. In these instances, prepaid cards may be the only way to access non-cash payment methods.
The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule. If we wouldn’t recommend an offer to a close family member, we wouldn’t recommend it on The Ascent either. Our number one goal is helping people find the best offers to improve their finances. That is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.