Prepaid Cards: What They Are, How They Work

National Consumers League
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If you are one of the millions of people who don’t have a bank account, what do you do if you receive paychecks from work or benefit checks from the government?

Check-cashing services are expensive, and it’s not always easy to find someone with a bank account who will cash checks for you. And keeping all of your money in cash isn’t safe — if it’s lost or stolen, it’s gone. It’s also harder to track your spending when you use cash.

One alternative to cash is a prepaid card, which works and looks like a debit card. You can use prepaid cards to:

• Make purchases in stores, online, by phone, and through mail order
• Pay bills
• Send and transfer money to friends and family
• Get cash from automatic teller machines (ATMs) or banks

How Can I Get a Prepaid Card?

Many employers now offer prepaid cards instead of checks to pay wages, and some government agencies provide prepaid cards for child support, unemployment and other benefits payments. You can also buy prepaid cards directly from banks and some stores. It’s important to know how they work, what they cost to use, and how the money on them is protected.

• Compare the costs and features of prepaid cards carefully to choose the one that’s best for you.
• As you compare features, understand what protections each card offers for different situations, including if the bank that issues the card closes.
• No credit check is required to get a prepaid card, but you will need to prove your identity and address.

How Do Prepaid Cards Work?

Your employer or a government agency can deposit money directly onto the prepaid card. You may also be able to put money on it yourself at any time. You can use the money on the card right away. The amount you spend or withdraw is deducted from it immediately.

Your card will have a personal identification number (PIN) — a secret number that you will need for some uses such as ATM withdrawals. When choosing your PIN, pick something that would be hard for others to guess. Don’t use obvious numbers such as your birthday. Memorize and keep your PIN private; don’t write it on the card or anyplace where someone might find it.

• Know when direct deposits will be made to your card and how much they will be.
• Ask if you can put money on the card yourself, how to do that, and what it costs.
• Get information about where and how you can use the card.
• Know the card’s expiration date and how you can transfer the remaining money to a new card.

Some prepaid card programs provide monthly statements. You may be able to check your card balance by phone or online. Keep track of the amount on your card so you won’t mistakenly try to spend or withdraw more money than is available — and pay unnecessary fees.

What Does It Cost to Use a Prepaid Card?

There is usually no fee to use a prepaid card to make purchases or pay bills. But there may be fees to get a card, add money to it, check the balance, withdraw money from ATMs or banks, contact customer service, or replace a lost or stolen card. There could also be a charge for not using a card for a long time. You may be able to use certain ATMs with no fee and/or make a limited number of free ATM withdrawals or deposits each month. Know if and when you will be charged for using your card and how much it will cost.

• Reduce the fees you pay by planning your card use carefully.
• Remember that fees are usually deducted from the amount that is on your card.

What if My Prepaid Card Is Lost or Stolen?

Follow the instructions for reporting lost or stolen cards immediately. Usually your funds will be frozen so no one else can use the card. You will receive a new card with your remaining balance on it. Some card issuers will voluntarily replace money stolen from customers’ cards, but not all do.

• Know the card issuer’s policy for lost or stolen cards.
• Be aware that if you allow others to use your card, you’re giving them permission to spend or withdraw your money.
• Keep information handy about how to report problems with your card.

What Other Choices Are There for Handling My Money?

There are a number of payment options available. Opening a bank account helps you build a credit history and save money. Look for free or low-cost accounts that pay interest and allow you to write checks and use ATMs. You may also want to consider credit and/or debit cards. Ask banks and credit unions in your area about your choices.

Safety.
Security.
Social Conscience.

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