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Pondering Prepaid Cards? What You Need to Know!

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Could a prepaid card or prepaid credit card be right for you?

They can kind of be the best of both worlds, if you know what you’re doing. At a glance, they look like any other plastic charge card, but if you—or a beloved dependent—sometimes goes overboard with the run-of-the-mill variety, they could present the best of both worlds: They’re accepted wherever standard cards are welcomed, but they have a hard limit based upon however much money you’ve prepaid it up to. They could still be used for impulse purchases, but (while we don’t recommend alcoholism) they can significantly lower your risk of getting the bill for a 12-foot-high TV just as a cruel hangover departs.

Kind of like one of those prepaid phones you might buy for an aging relative, they’re only good until you reach the limit you’ve set. After that, it’s basically locked until you load more funds. They’re kind of credit cards that aren’t credit cards; they have the same general function, but they don’t involve a ballooning line of debt. In a sense, they’re more like debit cards than regular old unsecured (or even secured) credit cards. The only possible downside is that some can carry high fees. Rewards programs are rare, too—but on the upside, they normally don’t affect your credit profile or FICO score.

If they sounded like a good fit until we mentioned the fees, don’t let that scare you off: Those are extreme cases in which somebody didn’t do their homework. Just shop around and you can find prepaid credit cards with lower fees and even other benefits. Many of them work like substitute checking accounts, but others do offer rewards programs. If it helps, think of them as a substitute for carrying large amounts of cash. They are secured cards issued by a financial institution (and secured with a prepayment.) Prepaid cards are not linked to a bank checking account or a credit union’s share draft account.

If you need an alternative to paying cash—or, if you’re unable to qualify for a credit card, they can be just what the doctor ordered. They can’t help your credit scores, but you can still enjoy the convenience and structure of using a card to make purchases. If you’re trying to get better self-disciplined against rash; impulse buys (but you don’t want the world to know), they look close enough like a regular credit card that nobody’s likely to know the difference when you use them. As we said, they don’t affect your credit score: They won’t contribute to raising yours, but they can’t get it lowered, either. Most of them are also good for keeping track of purchases. They involve a form of registration that requires collecting data like your name, your address, your zip code, and your phone number. Whether you prefer a specific network or you’re eager to minimize your fees, there is probably a prepaid card that fits your budget like a glove. If you give one a try, you might find it to be a simpler, more affordable means of keeping on top of your money.

How Prepaid Cards Work

Not everyone who chooses to use a prepaid credit card is struggling with overspending and debt: Some people just like to use them to keep organized, more than anything else. Some folk, who used to be stuck in a debt nightmare, like them as a sort of firewall to prevent themselves from sliding back into that mess.

It’s a sad fact that credit card debt is common in the U.S. today. The average national annual percentage rate (APR) on regular credit cards in September of 2019 was 17.54%. Among those who missed a payment, the average penalty interest rate was 28.45%. As many as 83% of U.S. adults hold at least one card, but overall, most own three. Credit cards are tools; mindless objects with no will of their own that can be used for good or evil as much as anything else. We’d never advocate anyone flushing their finances with one. We’re just not condemning them as though they were minted in Hell’s fires, either.

With that caveat, if you’re on active duty or a reservist, it’s important to remember that how you manage your wallet can directly affect your career. For multiple reasons, Uncle Sam doesn’t like service people being/going into debt. If you have ambitions of gaining or increasing a security clearance, heads-up: The higher-ups will pull a credit report on you as part of your application. This is a standard procedure. You can also lose what clearance you have (and worse) if your CO gets a letter of indebtedness and it’s determined that you can’t pay it off.

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We’re not trying to freak you out. We just want you to easily understand why you; America’s heroes, have to keep as debt-free as absolutely possible. That’s why a prepaid card could prove to be a blessing. It’s as useful and flexible as a garden-variety credit card, but it won’t let you spend money you don’t have (and might not see after paying bills, even on payday). We don’t want to be your mom—nor can we give you financial advice—but some of us have held massive credit card debt in the past and we wouldn’t wish that on anybody. We’re hyping prepaids here because they can help you start getting out of that situation (hopefully before the worst happens) and keep you climbing the ranks.

They’re an excellent idea for those whose credit has never dipped, too. If you recognize that potential for an awful misstep(s) sometimes when you’re tempted, to be blunt, you’re wise to be paying attention. Again: We wouldn’t be in this business if we thought credit cards were inherently evil. With that said, few things other than drugs or crime can turn a military career headed for the stars 180°; into a straight-down, soon-to-crater trajectory like mounting debt. It’s possible to give one to a spouse or family member as a gentle, loving means of preventing their spending habits from wreaking chaos, too. We’d just recommend doing so without phrasing it as frankly as we have here (because tact’s a friend that’ll seldom leave you sleeping on the couch).

Which One Could Work Best For You?

We normally try to present items in no particular order; giving preference to no one, but—because we always like to give a shout out to vet-and-active-duty-friendly businesses—we’ll take a look at Navy Federal Credit Union’s Go Rewards card first. We like that it has no hidden fees, no activation fee, no monthly fees, and no purchase fee. The only real drawback (if you want to call it that) to this one is that its rewards aren’t big enough to compete with regular credit cards. Since we’re talking about cards that keep guardrails up so you don’t go sailing off the cliff here, however, that hardly seems like an issue. It’s got what it takes under the hood where it counts and that’s what makes it an easy recommendation for us.

To sign up for their Go Rewards card, you’ll need a Navy Federal Credit Union membership. Only active duty, retired military service members and their families can get qualify to get one, but all three should find it reasonable, if not excellent for everyday use. Once you’ve ordered, received and activated your card, you have the option of adding one companion cardholder for a significant other, your senior parent, a caregiver, a nanny, or someone else. You can have up to five cards. This means that you could keep the budget better organized by designating one for groceries, one for household items, and another for weekend/holiday stuff. You can read more about the specifics here.

Next up we have the American Express Serve® Cash Back card. This prepaid lets you earn 1% cashback. That 1% is then applied to your account—and can be used for future purchases (every time that you buy something). This may not compete with the top cash-back regular credit cards, but we think it’s not too shabby for a prepaid. There is a monthly fee of $7.95 (unless you live in New York, Texas or Vermont), but spend a minimum of $795 on the card each month and you’ll earn enough cash back to make up for it. Better still, once you’ve made that up, any additional earnings are pure gravy.

We should mention that cash reloads can cost up to $3.95, depending on which retailer you use. Fortunately you have the option of loading money onto your card via direct deposit or through a bank transfer for free, however, so it’s not really hard to avoid those. In a bind, if you need cash, there’s no fee for withdrawing money from one of the 32,000 ATMs in the MoneyPass ATM network. If you run by an ATM that’s outside of the network, you’ll be charged a $2.50 fee per transaction by American Express (and whatever fee the ATM operator charges). We like the direct deposit, fraud protection and subaccounts (but FYI, purchases made on a subaccount don’t generate cashback).

For saving, money, we also like the Mango Prepaid Mastercard®. This card’s savings account has an annual percentage yield (APY) of up to 6% on balances as high as $2,500. There’s a 0.10% APY on higher balances. Other prepaid cards also allow you to set money aside in a separate savings account, but it’s rare to find a card that’ll reward you more for doing so than this one. To get the 6% APY, you’ll have to make at least $1,500 in “signature purchases” every month with a balance of at least $25 in your savings account at the month’s end. “Signature” purchases are transactions that you don’t use your PIN for (to authorize the sale).

While there is a $5 monthly fee, you can waive it if you receive at least $800 in direct deposits monthly. Domestic ATM withdrawals will cost you $3, in addition to any fee(s) an ATM operator charges. Planning ahead and loading the card from home should keep this to a minimum (if not prevent it altogether), though. Bonus: For every friend you refer who enrolls, activates an account and receives a recurring direct deposit, you can get $10. More information on this card can be found here.

We’ll round out this little survey of prepaids with MOVO®’s Digital Prepaid Visa® Card. Fraud protection for debit cards isn’t always as tough as most credit card security, but this MOVO Visa has extra safeguards. It allows you to create virtual cards tied to your main account that can be used wherever Visa is accepted. These temporary card numbers make it easier to pay safely. You can also add your card information to Apple Pay, Samsung Pay, and Google Pay. Yes: You’ll still get a physical card in the mail to use for in-store shopping. It usually comes seven to 10 days after your account is approved.

You can load it for free via direct deposit, from your bank account or with cash at participating retailers (though some retailers may charge its own fee on the transaction. You can also load from PayPal withdrawals, Venmo balances, mobile check deposits (although there’s a 3rd-party fee for instant processing), and crypto-facilitated transfers. You can convert cryptocurrencies like bitcoin to cash in a Movo account by using a blockchain-based MovoCoin (a free, one-time secondary virtual card with its own card number). There’s a fee of 2% and $2 per transaction to do that, though.

We like that the MOVO® Visa® card doesn’t have a monthly fee. The drawback to this may be that if you go more than three months without activity, a $4.95 inactivity fee is charged (every month) until you resume activity or close the account. Withdrawals from the 6,000 ATMs comprising the Visa Plus Alliance network won’t cost you anything, but you’ll pay at least $2 at other ATMs (plus whatever fee the non-network ATM operator charges). To get started, you’ll just need to download the Movo app from either the Apple or Google Play app store. There’s an option to sign up from within it.

Can You Prepay Your Way Out Of Debt?

In terms of reasserting yourself and establishing better spending habits, yes, you can use a prepaid credit card to contribute toward putting the brakes on, at least. If you have your impulse spending under control, it’s always wise to start building barriers for keeping it from crashing back through your finances all over again. Prepaid credit cards aren’t necessarily ladders for climbing out of the hole, but like quick-dry concrete, they can stop you from splurging and digging any deeper.

That initial step can prove itself invaluable in the long run, as a growing number of folks are learning. A study has suggested that 85% of adults are actively looking to get their spending habits under control and their budgets back in order. Like some of them, you may want to consider pairing a prepaid debit card (or two) with a traditional bank account to add an extra layer of the organization—as well as anti-impulse-spending security—to your finances.

Prepaid cards can almost literally be lifesavers. Nevertheless, if you’re looking at rebuilding your credit score, a secured credit card is probably a better option. You have to make a deposit when you apply for a secured credit card, but they are 100% actual credit cards; they can get the reckless back into trouble fast, so please proceed with caution. You definitely should wait until you’re absolutely sure that you can trust yourself with a full-on credit card account before starting this step.

It might be tempting to try to use a prepaid card for pre-authorization and security deposits, but we don’t recommend it.

While it may be very possible, you may not like the outcome: If you offer a card for the deposit on services like a hotel room, a car rental, or an in-flight purchase, the company involved may lock funds on the card for the duration of the stay/rental/et cetera. When this happens, you can’t use it (for anything else) until after the final bill has cleared.

As we’ve said, if your money act has always been together, you still might want to consider getting a prepaid card (and no: we’re not getting anything for saying so). The shrewdest of budgeters can still be surprised by situations that come suddenly, making the temptation to risk long-term debt through short-term card payments stronger than they’d previously believed it could get. At their worst—even if you doubt that you could ever find yourself in that boat—prepaids can help you keep money much better organized. They can help curb the spending of less discerning loved ones, too.

If an unforeseeably dark personal financial day comes and (yes—even you) find yourself pondering throwing it all away on plastic binges, having a prepaid set aside could help you tide yourself over until the urges pass. Would Odysseus have lashed himself to the mast with a prepaid card tucked within his to gain order to resist the siren’s incessant urges to “charge Pay-Per-View?” It’s hard to say… But the famously wise fictional hero probably would’ve given it some serious thought, at least.

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