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How Prepaid Credit Cards Can Steal Your Money
By Paul McDermott
You thought you could cut your costs and improve your debt situation by getting a prepaid card. As the saying goes, buyer beware. I learned some of this the hard way after I received a prepaid 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 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?

I know prepaid cards are popular. In fact, in 2006 around $24.81 billion was spent on these prepaid and gift cards. Well, a little research made it clear to me why retailers and card companies like these prepaid cards, too. Just like they got me with fees, they get the millions of others in the same way. In addition, somewhere between 6% and 25% of the value of the cards is never redeemed. That means the card companies collect between $1.48 and $6.2 billion! That is because if you have, say $5.00 remaining on your card and you make a $15.00 purchase, with many cards, you cannot pay with the $5.00 on the card and pay the rest with cash. So you have to "reload" the card. Well, when are you going to buy something that costs exactly what is on your card? So some balance remains and never gets spent.

As for fees? They also vary widely so check the fine print first. Generally speaking, gift cards purchased directly from retailers, hotel chains, restaurants, etc., have no initial cost to purchase and much lower - if any - fees. Prepaid credit/debit cards are another story entirely. Virtually all prepaid debit card distributors immediately deduct a certain percentage of the purchase price as a fee for the initial processing of the card.

Fees can then be charged for simply using the card to buy something, to check your balance, for refused transactions (like me), for registering the card with a name and address so it can be used online, expensive monthly and/or annual maintenance fees, the list goes on.

And as we found out, you need to know the exact amount left on your card. If you try to use your card and don't have enough left on it, you cannot use cash or another card to pay the remaining balance. And guess what? You'll be charged a fee! But don't call to check your balance, either, or you may pay another fee like I did.



Again most retailer prepaid cards don't have all these fees and charges.

One place you may want to check for a good deal on prepaid 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 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 card on a U2 CD instead.

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Paul McDermott reveals more of his hard earned lessons on prepaid free prepaid cards and finances over at Get Out of Debt Tips .
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