5 reasons to avoid pre-paid credit cards
Posted by Chris Inch on Sept. 20th, 2010
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.
Tags: Money, Life, Complaints, Tips, Misc
Comments
#2 Bob commented on Sept. 21st, 2010 at 9:38 a.m.:
Had the same problem with a prepaid card.
#3 Hill commented on Sept. 21st, 2010 at 10:38 a.m.:
Clinch, is anything going right for you these days?
#4 Adina commented on Sept. 21st, 2010 at 11:47 a.m.:
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 Jono commented on Sept. 21st, 2010 at 2:49 p.m.:
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.
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#8 Scoremore commented on Dec. 16th, 2010 at 10:05 a.m.:
thanks for sharing this.card holders must be aware of the expiration of their balance,the charges,credit,etc.to avoid pre-paid credit cards.this article helps all the consumers to avoid it.very informative and interesting.
#9 Johnny commented on Jan. 12th, 2011 at 4:18 p.m.:
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.
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#1 Louis Mastorakos commented on Sept. 21st, 2010 at 9:18 a.m.:
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.