Prepaid credit cards are growing in popularity. From 2008 to 2009, the use of prepaid cards shot up 61 percent, with more than $120 billion loaded onto these cards. With rising demand has come a glut of prepaid card offers with a wide range of features and fees.
[In Pictures: 10 Smart Ways to Improve Your Budget.]
The key to finding the best prepaid card is understanding fees. Fees vary widely from one card to the next, and the amount of fees charged for any card depends in large part on how the card is used. But there are five ways most consumers can slash the fees on just about any prepaid card.
1. Avoid Activation Fees
The fees charged to obtain a card vary significantly. While some cards charge activation fees of as much as $20, there are several free prepaid credit cards available. Because the activation fee is charged just once, it’s not the most important fee to avoid. But with free options available, there’s no reason to pay a fee just to get the card.
2. Use Direct Deposit
Virtually every prepaid card offers free direct deposit of paychecks and government benefit checks. In fact, several cards offer cash bonuses of as much as $25 when a cardholder signs up for direct deposit. Not only is direct deposit convenient, there are several cards that eliminate any monthly maintenance fees when a cardholder loads a certain amount (typically about $500) on the card each month via direct deposit. A good example of this type of offer can be found in the Mango prepaid MasterCard.
3. Choose Credit over Debit
Purchases made with a prepaid card can be processed as either a credit or a debit. Credit purchases typically require a signature, while debit purchases require the use of a PIN (personal identification number). As a result, credit and debit purchases are often referred to as signature and PIN purchases, respectively. The result of a signature or PIN purchase on the account is identical. The amount of the purchase is deducted from the available balance on the prepaid card. But the fees charged by the prepaid card company can vary between the two types of purchases.
When a purchase is made with a prepaid card, the retailer must pay what is called an interchange fee. These fees go, in part, to the prepaid card company. But here’s the key. The amount of fees the retailer must pay are higher for credit transactions than they are for debit transactions. And as a result, some prepaid card companies charge the consumer a fee for PIN transactions (debit), but not for signature transactions (credit). So when the cashier asks if that will be credit or debit, choose credit.
[See the best personal finance stories from around the Web at the U.S. News My Money blog.]
4. Get Cash Back at Stores, Not ATMs
Almost all prepaid credit cards charge a fee to withdraw money from an ATM. While there are some cards (like the Green Dot prepaid MasterCard) that offer free ATM withdrawals at participating ATM locations, these locations are not always convenient. As an alternative to ATMs, cardholders can generally get cash back at grocery stores and similar retailers without paying a fee. To do so, however, you will need to select a debit transaction.
5. Say ‘No’ to Celebrity Cards
To market cards to certain demographics, some prepaid credit card companies pay celebrities to endorse their card. A good example of this strategy is the aborted Kardashian Kard, which planned to charge consumers $99.95 just to get the card, plus a long list of additional fees. The card never got off the ground, however, because a picture of the Kardashian sisters on a prepaid card was apparently not worth a $100. Still, there are other celebrities hawking prepaid cards, and all of them come with unnecessary fees (celebrities do come at a cost). So when you are looking for a prepaid credit card, just say ‘no’ to celebrity-endorsed cards.