I’ve seen a lot of those “pre-paid” credit cards in stores recently, and in the past year or so, I’ve actually received three of them as gifts. With all due respect to the people who purchased them for me; please stop buying these pre-paid MasterCard and pre-paid Visa gift cards.
If you don’t know what I’m talking about, check out the Vanilla MasterCard or Visa’s Gift Cards. They are often branded as “gift cards” and sold along-side other gift cards at grocery stores and pharmacies.
At first glance, these might seem like the perfect gift for someone. It’s kinda like a gift card and sorta like cash, but in the end, if you can’t think of something personal to give, just give cash. Here’s my top five reasons why they should be avoided:
- Up front charges: You should notice immediately that if you buy a card worth $50, it costs more than $50 when the cashier rings it in. I just checked with a drug store near my house and the fee for activating a $50 pre-paid card is $5.75. That is an 11.5% fee just for activating the card! It seems strange that you would have to pay a fee for a card that is of no risk to the credit card companies (it’s pre-paid) and comes with no added benefits (more on this below). 11.5% is worse than a lot of loans and even some real credit cards.
- Expiring balance: As soon as you activate the card, the clock starts ticking. According to the Vanilla MasterCard web site, there is a service fee of $2.50 charged monthly starting on the 7th month after activation. The entire balance of a $50 Vanilla MasterCard will be depleted in 27 months with no action from you. Even if you have used the card and there’s only a tiny balance left on it, you can be certain that the credit card companies will gobble that small balance up before you know it.
- Accepted “almost” everywhere: Here’s an embarrassing little anecdote courtesy of a pre-paid credit card. Once upon a time, my wife and I received a $100 pre-paid card as a wedding gift. We saved it for a special dinner at a high-end restaurant. After a delicious $120 meal, I gave the waiter the card and asked him to put $100 on that card and we’d pay the rest in cash. The joke was on me. The card would not work. Every time that he rang it in, it would say “insufficient funds”. I learned, after the fact, that most restaurants have merchant accounts that automatically pre-authorize credit cards for an additional 20% on the bill, to account for a tip which they have yet to receive. So every time the waiter entered $100 on his terminal, it was actually trying to authorize for $120. Long story short, I had to put the entire dinner on my normal credit card, and save the $100 “gift” for another day.
Similarly, you’ll find that you won’t be able to use these pre-paid cards for gas either. Gas stations also pre-authorize your card for an amount higher than what you have available, so save yourself the embarrassment and keep the gift card in your wallet.
- What’s my balance? If you need to check the remaining balance on your pre-paid card, simply log onto the issuer’s web site and log in using the card number. This, of course, is of little help when you’re at the cashier trying to pay for some new clothes with your pre-paid MasterCard or Visa. Unlike normal gift cards, the person behind the counter has no idea how much money is left on your card. If you are short by even 1 penny, the transaction will be denied with no indication of by how much you were short.
This, of couse, leads to small amounts of money being left on the card ready for credit card company to scoop up when their next $2.50 monthly fee is issued. It’s impossible to try and predict the amount of money that the average person would leave untouched on a pre-paid card, but I’m going to guess that most people would forget about the card as soon as its balance dips below $5. So if you have $4 left on a card in your wallet, it’s likely that you’re going to let that expire and that $4 will go up in smoke. Even if the average amount is $2.50 left on a card, and the credit card company gets that $2.50, that’s another 5% fee added on top of the automatic 11.5% we paid up front.
- No reward points, no insurance, no disputes: Here’s something that I didn’t consider until I started writing this. Most credit cards have some sort of reward points that are accumulated through purchases and can be redeemed for things such as travel, groceries, hotels, etc. Don’t count on any rewards from your pre-paid credit card, because there are none. Similarly, you have no protection from the credit card companies the way you normally would. A lot of credit card companies will offer free insurance on purchases and extended warranties when you purchase items using your credit card. Not so with pre-paid cards. Lastly, if you have to dispute a charge put on your pre-paid credit card without your authorization, you are on your own. It is clearly stated that you must take up the issue directly with the merchant, and that you will not receive any help from the pre-paid card issuer. Lucky you.
- Returns/Credits: Ok. I know I said “top 5”, but here’s another issue that you might run into, so I thought I’d tack it onto the list of why pre-paid credit cards suck. If you throw out your pre-paid card after the balance reaches $0, you better hope that you have no issues with the products you purchased. The only way that you can return an item purchased with a pre-paid card, is to return the money directly onto the card. Cash returns are not allowed. If you no longer have this card, you’re out of luck. The Vanilla MasterCard also takes up to 30 days to return the money to your card (maybe so they can grab another $2.50 from you).
The moral of this story is: The next time you are thinking of getting someone a pre-paid credit card, skip the $50 Visa Gift Card and give them $55.75 in cash instead. Even if they decide to burn a $5 bill every 2nd month, at least they’ll still be able to use whatever is left for a tank of gas.