Use of reloadable prepaid cards — which can be used like credit and debit cards yet require no bank account or credit check — is surging. But the cards have a variety of drawbacks to consider.
Reloadable prepaid cards can come with a confusing array of fees — for activation, monthly maintenance, transactions, ATM cash withdrawals, balance inquiries, customer service calls, adding money to the card, inactivity and more. Each card's fees are different, so be sure to read the fine print.
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Prepaid cards are not covered by the laws that protect credit and debit cards in case of billing errors. There also isn't the same legal consumer protections against losses due to hacking. Most prepaid issuers do offer "zero liability" protection to users, but non-profit advocacy group Consumer Action found these policies to be weaker than credit/debit card legal protections.
Although some people think that using prepaid cards will help build a positive credit rating, it won't. That's because you're not borrowing money, Consumer Action said. "Prepaid transactions are not included in any of the credit reports provided by the three major national credit reporting bureaus," the group stated.
Getting help over the phone from some prepaid card companies can be difficult, and if you don't already have an account it might be impossible, Consumer Action found. However, the group's research found that American Express, Mango, OneWest, Yap and Western Union provided superior phone service for their prepaid cards.
When you use a prepaid card at a gas station, a hold of as much as $75 might be placed on your account, Consumer Action said. Similarly, if you use your card to guarantee a hotel room, a hold might be placed on funds paid into the account at least for a few days.
Scott Wilson, Los Angeles Times