Prepaid Credit Cards Not Always a Good Choice

Imagine my frustration - I had found an old Beatles CD I had been looking for in an online auction site but my prepaid gift card was being refused as payment. I knew I had exactly enough money left on the prepaid debit style card for the LP and shipping because I had just checked my balance - what could be the problem? To be sure, I dialed the 800 number on the back of the prepaid gift card again and punched in the card numbers. The automated voice told me that my prepaid balance was now $2.00 less than it had been just minutes before, and I had not even used the card!

I went to the website of the prepaid credit card and entered my account number. At least I could now clearly see why my balance was so much lower. I was charged $1.00 for the failed online purchase. And there was the extra $1.00 charge for the "toll free" phone call I had just made to check the balance. OK, so I am responsible for knowing the rules, but who would have thought I would be charged for making the call to check my balance?

Such are the pitfalls of prepaid gift and credit cards and so-called "reloadable" prepaid cards that allow repeated deposits into its account. The popular gift cards have been a big hit with consumers for their convenience. They've also been a big hit for retailers and the credit card industry but for two very different reasons: non-redemption rates and fees. Various research puts the non-redemption rates (the dollar value of cards which is never spent) of prepaid gift and debit cards between 6% and 25%; even the lower figure would have to be called a boon for card distributors when you consider that according to the National Retail Federation (NRF) Gift Card Survey, consumers spent a whopping $24.81 billion dollars on gifts cards in 2006. Many states are enacting laws aimed at recouping this unspent money under the unclaimed property umbrella most state treasuries use today to hold anything of value an owner has not stepped forward to show possession of.

As for fees? They also vary widely so check the fine print first. Generally speaking, gift cards purchased directly from retailers, hotel chains, restaurants, etc., have no initial cost to purchase and much lower - if any - fees. Prepaid credit/debit cards are another story entirely. Virtually all prepaid debit card distributors immediately deduct a certain percentage of the purchase price as a fee for the initial processing of the card.

Then watch out for a long list of other charges. Some charge for simply using the card, checking your balance and for even registering a card so you can use it for online purchases. Then there are monthly maintenance fees that could be tacked on. I am all for a business covering its costs, but this sounds excessive to me.

These cards also usually require you to know the exact amount left on the card to use the remaining balance ( nice trick since you may be charged to find out what that amount is!). Fortunately, most retailer-direct prepaid gift cards are free from this pesky habit. The store will swipe your card, deduct the remaining balance and ask you to pay the difference.

Don't rule out your local bank as a place for good deals on prepaid credit cards. They often have fewer fees and are less restrictive. And don't forget that all distributors of prepaid gift and credit cards are required by law to explain what fees and charges you are subject to. Do yourself a big favor and check these out and you could save yourself a lot of money and disappointment. I did not get that Beatles CD, but I used the lesson I learned and emptied the balance of my card on a copy of a U2 CD that I have really come to like a lot.

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Paul McDermott reveals more of his hard earned lessons on credit cards and finances over at Get Out of Debt Tips .