5 reasons to avoid pre-paid credit cards

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.

The perpetrators

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.

Avoid prepaid credit cards

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.

36 Thoughts on “5 reasons to avoid pre-paid credit cards

  1. Louis Mastorakos on September 21, 2010 at 9:18 am said:

    One of the complaints you have is actually illegal now with regular gift cards – they can’t expire and they can’t have fees that whittle down the balance. I assume the fact that they can act as credit cards is what gets these types of cards through that loophole.

    • I have a Vanilla Gift Card and it doesn’t register the swiped credits from any RETAILER. I lost 42$ at Aldo because the girl accidentally rang 16$ earrings wrong and credited my Vanilla Gift Card. They show the Credits as purchases so I’m out 42$ and can only write to the states attorney about the situation.

  2. Had the same problem with a prepaid card.

  3. Clinch, is anything going right for you these days?

  4. A lot of the survey panels that I’m on have switched from offering rewards like paypal, cheques, and amazon.ca e-certificates to these stupid cards. I hate them. I refuse to accept them, and so my points just sit there unredeemed while I wait for the companies to change the reward options again.

  5. Well said Inch! I couldn’t agree more. While the cards seemed like a great idea when they first came out, these issues clearly make them a poor choice.

  6. Johnny on January 12, 2011 at 4:18 pm said:

    Very well constructed and completely accurate info. I came online to search for some blogs and stuff to boycot or petition against these stupid things and I came across your article.
    I had a $100 gift card as a rebate “gift” from my satellite TV provider. I used the card once for lunch (about $10). It worked fine and I thought it was kinda cool, thinking i could keep it handy when i was low on cash and went out for lunch. Well, i kind of forgot about it for awhile and decided i had better use it before it expires (it showed an expiration date coming up in a couple months). I tried to use it for gas and it didnt work, i tried to use it for about $60 in groceries and didnt work. Frustrated, i threw in the back of my wallet again. Next time i pulled it out it was expired. I called the company to see if there was anything i could do since they just ate up $90 of my $100 card. They said that they could not and that the balance left on the card was only $49.xx. So.. Even if i had used it before it expired it would have been worth 1/2 the original value.
    RIP OFF. How do they get away with it?
    i did find the only good purpose for them is for international internet transactions (online gambling) and even then you have to make sure they are good for International.

  7. Oh give me a break, people. You are told very specifically that there is a time limit to using the full value of the card. This should not be a surprise. If you’re worried about a credit approval exceeding the limit of the card, ask the cashier to split the bill across two cards. It isn’t rocket science.

    • Jim you are a dick. The prepaid cards are a rip off…they capitalize on the fact that most people will not spend the last few dollars on them. You have a million people who leave 4 or 5 dollars on these cards and the credit card company makes 4 or 5 million. Also beware people…don’t buy these cards if you are using them to pay a telecommunications bill whether it’s by phone or online or even at the cash register. They will put a hold of 15$ on the card as well as the telecommunications company so if you try to pay 100 dollars on a bill…you can only use 69$ out of a 100$ card. I just went through that with for a 250$ phone bill. I bought two 100$ cards and a 50$ and tried to make a online payment. long story short…I could only pay a total of 160$ on 250$ bill. They also can’t be used for cash advances and they are non redeemable. These cards are becoming useless because a lot of places don’t even accept them anymore. They are no good for renting a motel either. I bought the MasterCard but I’m sure they are all the same. Never again!

  8. I just figured out that you cannot use the entire value of the card even if you wanted to… Here is what I just figured out:

    If I use a 100 dollar card at a restaurant. They hold 20 dollars and I can only use $80. I now have to wait up to 7 days for the $20 to be put back on the card from the hold.

    The next time I use it I can only use $16 of the $20 due the hold. I now wait 7 days to use my $4 dollars.

    I now can only use $3.20 and wait again.

    I called in and asked if my assumption was correct. They said yes. I then asked how I could ever use the full amount of the card and they did not know.

    They said “sir, please read the terms and conditions with the card”… So, I read the entire thing and there is not mention of 20% hold back. I let customer service know so they looked on line and they could not find it. They said it was on the frequently asked questions and that would suffice. OMG.

    I must be missing something as this is the biggest scam I have seen in my 41 years on the planet. Brutal

    I am calling CBC and CTV to see who will do a story on this mess.

    Rich

  9. river in Colorado on February 8, 2013 at 5:41 pm said:

    I Agree With #16 Comments…. we Are Informed About The Fees And Expiration Dates. Its Not Complicated People. You Want To Avoid The 20%
    holdback amount? Don’t Use It At a Gas Station Or Restaurant. BTW, The Fee At My Grocery Store Is $3.95 For a $100 Card. That Is a Reasonable Percentage.

  10. Andrea on March 15, 2013 at 7:10 pm said:

    Ah, the frustrations of using prepaid credit cards! Whenever I get one as a gift, rather than being grateful, a feeling of dread comes over me as I can imagine the embarrassment of being stuck at the cashier having the most tiresome transaction… whether it be because they don’t know how to process it or it’s declined or the card value has been depleted due to their ridiculous monthly service fee. I HATE PREPAID CREDIT CARDS!!! Great article, by the way 🙂

  11. Lori McConnell on November 23, 2013 at 2:36 pm said:

    Thank for the posts! i just got one of these from who knows where (though I’m suspicious that it might be one of the 5% Back Merchants listed, none of which I’ve been to lately) and I was looking for some idea of what this free money was really getting me into. You nailed it!
    Though it does sound like a $70 card may get me $50 to $60 as long as I don’t do anything but buy stuff. Are there long term charges or anything where I could be billed beyond the life of the card?

  12. Vanessa on March 6, 2014 at 2:42 pm said:

    I bought one because I didn’t want to have to go through actually getting a credit card to buy things online. I didn’t notice the $5.00 activation fee, and further. I have only used $25.00 of it. Afterwards, there was $18.00 on it. I have to wait 24 hours to make another purchase. So I did, and then went to purchase something else. My card was declined and there was a $2.00 fee for it being declined. So I waited another 24 hours and tried again. Card was once again declined and this time it was a $4.00 fee. It seems I am not allowed to buy anything with it again, I had to go and buy all at once. How stupid is that?

  13. Scharlotte on November 21, 2014 at 10:06 pm said:

    Hi–for all you folks out there I have to agree it isn’t the greatest system in the world. There are down sides, but for me the up sides outweigh them. In this age of identity theft and the less my information is out there the better it is. And lets not forget that companies have misleading things like free for 30 days, and then in the little print , if you read it, it says will be automatically deducted and resubscribed… so ya like I really want that to happen and once they get your number in their clutches , its really hard to stop that from happening… It also protects you from making an error in the order and you are in a hurry and you’ve hit the wrong quantity and arent paying attention that the delivery is now twice as much as they said… ((yes we all know that happens)) It’s a little different then mistakes with your on line bill payment as your bank is for the most part very ready to correct it. Not like these on line companies , that haggle on and on and you may see your money in 6 months if your lucky. I used to hardly ever shop on line , but now find I am doing it more and more. And I pretty much plan my purchases and write on the card what is left.. The trick to getting that balance off…you have to know the exact amount to the penny, then tell the teller it will be a split payment. If you do well i think i have 8 so lets try 5 , it may or may not work. But I would rather just lose that money to safeguard as much identity as i can. The least favourite card I have is visa perfect gift. the rest don’t require all that registration stuff –and like so use a bogus name–how are they going to know , you do not supply any information ,, at purchase.. I would keep the town and postal code/zip cause the cash registers probably register that much at purchase/activation… well so sorry long winded , but thats me blabber mouth… have a great holiday shopping adventure…

    • Peter on May 22, 2015 at 2:15 pm said:

      I use a 100 dollar vanilla mastercard to pay my cell phone bill every month. I think if you get this card just activate it and use it as soon as possible me within a day thats why they are prepaid. I have used them online and never had a problem.

  14. Matt on July 14, 2015 at 8:21 am said:

    Hey I agree with your analysis. Though I want to say that if you were given the gift cards by friends or whomever, you shouldn’t be worried about the fees the cards have up front lol because the buyer pays for it. Unless you just feel that it’s not reasonable for them to charge a fee for purchasing a card. I must agree with you about the hassles you will go through if your card doesn’t much left. I have just bought two $500 prepaid cards myself, that is because my amex offers me $250 bonus after $1000 spending. So I paid about $1010 for both gift cards and get $250 back so I saved about $240. Lol that’s the only time I would buy these cards.! Btw I bought them at a grocery store so another 3% cash back. That’s $15 on each, which can cover the activation fees lol

  15. I’ve given prepaid credit cards as gifts. My recipients were surprised but, appreciative of my gesture. I told them that the card is activated and ready to use. I finally got to use one when I won a prepaid Visa card. I couldn’t split payment for an online order that was automated to bill the full amount of payment. They didn’t have phone orders so, the only way to purchase it was through a card that had sufficient funds to cover the full cost of the purchase online. I’ve used the card twice to buy shoes as a gift and flavoured green tea. There were no problems using them as payment. I read all the details that came with the card and, also online when I registered. I know about the service charges, etc. While it may not be acceptable to charge to activate a prepaid credit card versus a store gift card, it is the way the card issuer earns. Think of it as the equivalent to independently owned ATM machines. They charge double: one for using their ATM and two, from your bank for having to offer the convenience of their services through a non-bank branded ATM. In the Philippines, we have Bancnet, Megalink, etc. You can withdraw money using these ATMs that have banks conglomerating to form the network to offer convenience to their customers. That means I dont pay service fees for withdrawing from them if my bank is affiliated. This privilege allows you to bank almost anywhere as they are across the country. You don’t need to locate the nearest branch of your bank for those withdrawals to avoid the fees. But, the prepaid credit card is still a credit card albeit, with less service benefits of a regular credit card. It’s good for short term purchases and payments. I’m happy to have been able to use it without hassle. Thank you for sharing your experience. I didn’t want to limit the shopping experience of my recipients to stores, that’s why I give prepaid credit cards, so they can use them anywhere. Like Matt wrote, you can get rewards on the card that you use to purchase the prepaid credit cards, but again, this is probably not for everyone who doesn’t like how the business is run.

  16. Has anyone else had a prepaid card use/purchase declined, only to discover that there is a limit of 10 purchases permitted per 24-hour period? And this limit does not appear in written or online documentation. I’ve looked, can’t find it anywhere. WTF? Spoke to 4 reps, might as well chat up a bag of hammers. I know, it’s the world we live in, but…for real? They just make up whatever they like. Yet another ‘that’s just wrong’ experience involving a financial institution. Using a prepaid helped me feel safe, now I just feel like I need to wash.

  17. Amen. These things suck. Thanks mom

  18. Bought vanilla mastercard pre-paid because i had an emergency, but the operator told me the store had not activated it properly, not sure if that’s true, then proceeded to tell me the card would only actvate in 4-5 days. What a waste of money. They of course had no warning on the card to explain process time may take a long, long time, i kinda really hate them for waiting my time

  19. Does a pre-paid credit card work when you put in it’s number to make a nintendo id?

  20. smarty jones on March 18, 2016 at 12:54 am said:

    I always donate the remaining balance to our local food bank. That’s how I avoid issue #4.

  21. Mmmmm on April 18, 2016 at 5:07 pm said:

    Rage much..

    1. Of course there is an activation fee.. Prepaid has no interest how the hell do u want them to make money LOL

    2. If you can’t use a credit card in 1 month to buy $50 worth then that is your problem. If I got it as a gift of course I’m going to spend it ASAP for buying things that you need to live…

    3. That sucks, get over it, use your money or other CC and save that prepaid for the millions of other places that accept it…

    4. You get your balance after a purchase, that’s your own fault..

    5. No interest on prepaid cards means they can’t spend money on that shit , they would be losing money to offer insurance and/or reward pts..

    6. When you read that on the card you should be careful about what u buy.. Don’t go buying clothes that doesn’t fit u.

  22. I was hoping to use a prepaid card to avoid exposing my debit card account number. I would love to try some free trial products. But they are never free. Just by contacting the company to receive a free trial, I am actually giving the company a ” blank check” access to my account. I don’t like the idea of auto payment automatically attached to my card, the cost of the product goes up considerably as well, compared to the ” free trial price. I think consumers should be protected and this practice should be illegal. I don’t want a commitment to a company for anything unconditionally. That long a commitment should be reserved for marriage vows only. Once again the companies can make mistakes, and with this in mind, the consequences for the consumer could reach catastrophic levels.

    Thank you

    • Sorry to all. I appreciate your listening and apologize getting off the subject of prepaid cards and spilling my disappointment over to debit cards, either way, I do not find the practices fair to consumers.

      Thanks again

  23. recently on the news there have been reports about using their prepaid debit at the automatic teller machine or any where card skimmers are being placed on automatic teller machines gas pumps where the criminals can access the information on any card including prepaid debit cards the victim puts in their pin number where they use their prepaid debit card they get their statement even prepaid debit cards are not safe from card skimmers

  24. Charlotte on September 29, 2016 at 11:28 pm said:

    I have had unhappy experiences with prepaid gift cards, and will never buy them again. Neither will my family and friends. Store cards such as lowes are great, and these particular cards never failed me. The only way to stop the prepaid card dilemma is never to buy them. If enough people follow this advice, the companies will not be able to function. The consumer really has the upper hand. We were in business at one time, and our guiding principle was, “The customer is always right”. We do have the power to control what I consider an unfair arrangement. Buyer beware.

  25. kelly dolin on October 7, 2016 at 8:18 pm said:

    We (consumers) should be able to charge these company’s a ‘small fee’ for each inconvenience & again to call the company for answers! A larger fee for the embarrassing declined purchases at store registers!

  26. DENNIS W Mcnulty on March 2, 2017 at 1:28 pm said:

    Incomm a company that has rights to these cards is a scam. You buy it then you loss. If card is stolen or faudulently used. you just loosed out. They will not stop any illegally done purchases. They do not protect you from crimes but tell you to bad.

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