Beware of Prepaid Credit Cards

By: Paul McDermott

You thought you could cut your costs and improve your debt situation by getting a prepaid credit card. As the saying goes, buyer beware. I learned some of this the hard way after I received a prepaid credit card as a gift. I tried to buy one of my favorite Beatles CD's at an online auction. I was surprised that my purchase was rejected, even though I knew the balance was enough to pay for it. The real shocker was that when I called the 800 number on the card to double check the balance, they charged me $1.00 for the call!

I went to the website of the prepaid credit card and entered my account number. At least I could now clearly see why my balance was so much lower. I was charged $1.00 for the failed online purchase. And there was the extra $1.00 charge for the "toll free" phone call I had just made to check the balance. OK, so I am responsible for knowing the rules, but who would have thought I would be charged for making the call to check my balance?

Well, it seems these issues are common for many of the prepaid gift and prepaid credit cards. For many, these prepaid cards have become very popular because of their convenience. Retailers and credit card companies like them a lot too, for another reason. In addition to the fees they charge, there is also a significant percent of these cards that never get used up. It is estimated that 6% to 25% of the $24.81 billion total value of prepaid cards purchased in 2006 goes unspent!

Are any of these cards worth it? First, make sure you read the details on the fees and charges. Gift cards from restaurants, retailers and hotels usually have no intial charge, and often no fees at all. And you can use the balance of a card on a purchase and pay the rest with some other form of payment, so you never have to leave a balance on your card. If you get a prepaid credit card from one of the credit card companies, expect to pay a processing fee right up front.

Then watch out for a long list of other charges. Some charge for simply using the card, checking your balance and for even registering a card so you can use it for online purchases. Then there are monthly maintenance fees that could be tacked on. I am all for a business covering its costs, but this sounds excessive to me.

If you do have a prepaid credit card that has lots of these fees, what are you going to do? You cannot use the remaining balance on your card if it is less than what you owe. You could pay another fee. But don't call to get your balance either. You could be charged again! Try one of the retailer prepaid cards to avoid these unreasonable fees.

One place you may want to check for a good deal on prepaid credit cards is your local bank. They often have some of the best deals and least restrictive rules for prepaid cards that will not limit you to a single retailer. Like all cards, the law requires all prepaid credit and gift card distributors to clearly explain the fees and charges. Just be sure to take the time to compare cards and you could save yourself a lot of money and frustration. I never did get that Beatles CD, but I learned a big lesson and used the remaining balance of my prepaid credit card on a U2 CD instead.

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Paul McDermott reveals more of his hard earned lessons on credit card debt relief and finances over at Get Out of Debt Tips .
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