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Prepaid Credit Cards Explained
Credit cards offer many benefits. One of the most obvious is that they allow us to enjoy a purchase now and pay for it later, either in full or in payments. In exchange for that, we pay interest on the outstanding balance. But what if we are interested in the other benefits of plastic and don’t want to pay interest?
Sometimes we use credit cards as a matter of convenience. They make it possible to go shopping without a wallet full of cash. They also facilitate buying online or by phone and making reservations. If you want a credit card for reasons such as these, a prepaid card might be a better choice.
Prepaid credit cards are, in essence, debit cards. But instead of being connected to a checking or savings account, they allow cardholders to make deposits directly to the card issuer. They can use the card up to the amount on deposit in the same way they would use a credit card. But instead of running up a balance that must be repaid, they are simply deducting from the amount they have deposited.
These types of cards have several potential uses, including:
* Parents can purchase prepaid cards for their children. For teenagers, it provides a way for them to shop without carrying a lot of cash. For college students, it provides quick access to funds from Mom and Dad. They can simply deposit money onto the card, and the student can access it instantly instead of having to wait for a check in the mail.
* Those with a poor or non-existent credit history can use prepaid cards to shop from home. Whether they want to shop online, pay bills at a company’s website or make travel reservations, a prepaid card can help them do those things without submitting to a credit check. (Keep in mind, however, that some merchants are reluctant to accept prepaid cards. This most often applies to hotels, airlines, rental car providers and subscription services.)
* Prepaid credit cards make ideal gifts for those who do not live close by. Instead of buying a gift card that the recipient may or may not use, you can send a card that may be used anywhere major credit cards are accepted. It’s safer and more convenient than sending cash or a check through the mail.
* They make a good substitute for a debit card if you’re traveling. Whether you prefer not to carry your bank debit card when you’re traveling, don’t have one or want to limit your spending, a prepaid credit card can help. Many such cards also offer zero liability if they are lost or stolen, so you don’t have to worry about your travels being ruined by a thief.
Prepaid credit cards are available from discount stores, drugstores and many other retailers, as well as online and from some financial institutions. They’re easy to set up and reload, and can be used almost anywhere. If you want the convenience of a regular credit card but can’t or prefer not to use one, a prepaid card might be just what you’re looking for.
The Importance of PIN Numbers
Credit and debit cards are the ultimate in spending convenience. They make it easy for us to buy online, by phone or by mail. They help us reserve cars, hotel rooms, plane tickets and more. They eliminate the need to carry large amounts of cash. And when we need cash but don’t have it, we can take them to the ATM and withdraw money in a snap.
Credit and debit card issuers institute certain security measures to prevent cards from unauthorized use. One of the most important of these measures is the personal identification number, or PIN. Cardholders are required to select a PIN number when their cards are issued. They must enter this number when withdrawing cash from an ATM. With debit cards, it is also required when making purchases from many merchants.
Keeping our PIN numbers safe is extremely important. If someone steals a credit or debit card, he can’t withdraw cash without the PIN number. But if the thief has that number, he can withdraw or transfer money and check the cardholder’s account balance. With credit cards, you can only be held liable for up to $50 in unauthorized charges. But with a debit card, you may have to pay as much as $500.
Most of us know that it’s unwise to write down our PIN numbers, especially if we carry them with us. So we try to choose numbers that are easy for us to remember. Unfortunately, numbers that are easy to remember are also easy for a criminal to guess. Here are some numbers that are often used as PIN numbers, but are not the best choices:
* Birthdays (our own or those of family members)
* Birth years
* The last four digits of your or a friend or family member’s phone number
* The last four digits of your social security number
* Sequential numbers (such as 1234, 5678, etc.)
* Repeating numbers (1111, 2222, etc.)
* Your house number
Any of these numbers are pretty easy for a thief to guess. In the case of phone numbers and social security numbers, someone could find those by stealing your mail or trash. Birthdates are also reasonably easy to find out.
Still, we need a number that is easy for us to remember. If we forget PIN numbers, we usually have to contact our card issuers and have them reset. When you need money right away, that’s the last thing you want to deal with. Here are some tips for choosing a secure PIN number that you won’t forget.
* Use the birthday or birth year of a distant or deceased relative, or of someone famous (unless you’re a well-known fan). In general, birthdates are fairly safe as long as they aren’t those of someone in your household. But the farther removed the person is, the better.
* Think of a major event in your life that is significant to you, but unlikely to be significant to anyone else. A wedding anniversary is pretty obvious, but how about the date you became engaged, or the day you got your learner’s permit?
* Use the last four digits of a phone number you know but no longer call. This could be a phone number you had when you lived somewhere else, that of a former employer or that of a deceased relative.
A PIN number could be the only thing standing between a criminal and your hard-earned money or credit line. Choosing it carefully will give you peace of mind while allowing easy access to funds when you need them.
Paying Down Credit Cards versus Building Up Savings
If you’ve ever been hit with an unexpected expense, you know that you need some source of funding to fall back on at all times. A savings account makes the most sense, because it gains interest. But many consumers use their credit cards as a safety net, even though they know it will cost them more in the long run.
Those who are saddled with credit card debt, either because of using them for emergencies or simply overusing them, are painfully aware of how interest and fees accumulate. They swear that when they get out of debt, they will start saving money to avoid having their finances fall back into ruin. And if they’re serious about it, they might put every spare dollar toward paying down that balance.
Paying off high-interest debts has definite advantages. Most importantly, it can save you lots of money over paying just the minimum payment each month. It also frees up your credit line so that you can use it if you have to. But is paying down credit card debt more important than building up savings?
There is some disagreement among financial experts. All agree that your bottom line is positively affected by paying as little in interest as possible. And some find that to be reason enough to put money toward paying down your balance before you try to save up. But others feel that the importance of having an emergency fund trumps the money saved in interest charges.
One argument against paying off credit cards before starting to save is that it leaves no resources to use in case of emergency except for the credit card. If you’ve paid down your balance sufficiently, you may be able to use the card if something comes up. But you’ll also experience a setback in paying it off. That means you’ll pay more in interest, and it will be longer before you can start that savings account.
By the same token, using a credit card for emergencies is one of the habits that those with debt issues need to break. Putting yourself in a position in which you have no choice but to do so is a step in the wrong direction. By saving up an emergency fund, you can avoid using credit until you’ve eliminated the debt you already had.
Choosing between paying off credit card debt and building up a financial cushion can be difficult. But if unemployment or some other major financial problem is a possibility, building up your savings is usually the best option. Putting away at least a month’s salary before you start paying off your debt will allow you to breathe easier.
Lost or Stolen Credit Card?
When it comes to finances, few things are as unnerving as losing a credit card or having it stolen. By the time you realize it’s gone, someone could be living the good life and charging it to you. But by taking action quickly, you can avoid most, if not all, liability for unauthorized charges.
When their cards go missing, cardholders are protected by the Fair Credit Billing Act (FCBA). This law mandates that as long as you report your card missing or stolen in a timely manner, you can be held liable for no more than $50 in unauthorized charges. And if you report it before the card is used, you can’t be held responsible for any charges made.
If you find that one or more of your cards are missing, here’s what you need to do:
1. Report the missing card to the issuer immediately. If you don’t know the phone number to call, it should be printed on your credit card statements. Reporting the theft or loss as quickly as possible is crucial, so it’s best to keep a list of your card numbers and the fraud reporting phone numbers in a safe place for easy access.
2. Write a letter to each credit card issuer summarizing the details of your phone conversation. Include your name, card number, when you noticed your card missing and when you reported it. Also include the name of the representative you spoke to. Make a copy for your records, and send the letter via certified mail or with a return receipt request.
3. Keep a close eye on your credit card statements for several months. If you notice any charges you didn’t make, contact the issuer immediately. You should not have to pay any charges made if you have already reported your card lost or stolen.
Minimizing Your Risk
Anyone can have his credit card stolen. But there are a few things you can do to minimize your risk. These include:
* Leave your credit cards at home when you don’t plan to use them. You’re much more likely to have them stolen from your wallet or purse than from your home, especially if you keep them locked up.
* Do not carry your PIN number with you. If you do, a thief can easily use your card to obtain cash advances.
* Carefully check your credit card statements as soon as you receive them. Thieves do not have to have the actual card to make charges to your account. They can often make purchases online, by phone or by mail with only your name, card number and expiration date. These can be obtained by stealing records from stores you’ve done business with in the past.
* Be careful when using your credit card. Only buy online from websites you trust, and be aware of suspicious activity when using your card in person. Thieves have been known to snap pictures of credit cards with cell phone cameras and use devices to read cards as they are swiped.
No matter how careful we are, having our credit card or card number stolen is a possibility. By keeping an eye on account activity and taking action quickly if a card is lost or stolen, you can prevent a thief from benefiting from his crime and avoid having to foot the bill.