Prepaid credit cards vs. gift cards

Credit card regulation limits retailers' gift card abuses

It was a brilliant piece of marketing. Somehow, stores have persuaded us that it is unforgivably lacking in thought to give a seasonal gift of hard cash, but absolutely fine to provide a rectangle of branded plastic that does exactly the same thing.

Come to think of it, it's worse than that, because cards don't do exactly the same thing. There's no expiry date on cash. You can spend it wherever you want. And you don't have to pay inactivity fees on it if you decide to keep it. In fact, you can earn interest on it, though admittedly not much at the moment. Thanks a lot, retailers, for the gift that goes on taking.

In fact, as CNN Money pointed out yesterday, gift cards this year are very slightly less of a terrible bargain that they were last year. A new credit card regulation (part of the Credit CARD Act of 2009) came into force August 22, 2010, that prevents gift cards issued after that date from expiring in under five years, and stops issuers charging inactivity fees during the first 12 months of each card's life. After that, of course, retailers can still charge you extra for not spending the money you've lent them.

Prepaid credit card an alternative?

CNN Money also reported on new websites that allow someone with an unwanted gift card to trade it in, either for cash or for another card that they actually want. Apparently, you can get up to 80 or 90 percent of your card's value. And this is widely regarded as a good deal!

Of course, there are plenty of bad deals around for prepaid credit cards too. But at least you can spend the money that's been loaded pretty much where you want. Indeed, if you shop around, there are some good deals out there, including some (such as The Western Union^® MoneyWise^TM Visa^® Prepaid Card) that don't charge monthly maintenance fees. And, if you like pink, and wish to contribute a percent of your purchases to the National Breast Cancer Foundation, you could check out the Pink ACE Elite^™ Visa^® Prepaid card.

Prepaid credit card use can be expensive too

The best thing about prepaid credit cards is that they're not really credit cards so you can't spend more than you have. The worst thing about prepaid credit cards is that they're not really credit cards so they're almost entirely lacking in the protections that credit card regulations can provide.

And that means that you really do have to take great care in selecting one. Earlier this month, NPR looked at prepaid credit card use, and revealed some of the extraordinarily high fees that some charge. But don't let that put you off.

As NPR suggested, think about how you're going to use the card, and then find the one that should charge the lowest fees for your particular needs. Just don't then use it to buy a gift card.

Published 12/29/10 (Modified 4/22/12)