Tuesday, June 9, 2009

Stored Value Cards

A few days ago, a summer intern in our office mentioned that her pay from another part-time job she has, came in the form of a stored value card. For each pay period, her employer loaded the funds onto the card. She said that she can use the card to make purchases from most retailers. But while she is not charged a fee for using it at some retailers she is charged at others. So why would anyone want to have to pay someone to take their money? How do stored value cards, also known as prepaid cards, work? Are there ways to avoid the fees or at least control the costs of using it? What is a stored value card? Stored value cards come in many different forms and can serve a variety of purposes. Anyone who makes purchases with a retailer gift card, places phone calls with a prepaid telephone card, or buys goods or services with a prepaid debit card is using a stored value card. Payroll cards and government benefit cards are other examples. The magnetic strip on the card stores information about the funds available to the card. There are two basic types of stored value cards. The first type is the prepaid or closed system card, a single purpose card such as gift card that can be used only at a particular retailer. The second type of card is a multi-purpose or open system card that can be used to make debit transactions at many different retailers as well as for receiving direct deposits from an employer, and making ATM withdrawals. Some multi-purpose cards may carry the VISA or MasterCard logo and can be use any place there Visa or MasterCard credit cards are accepted. A stored value card does not extend a line of credit, but bears a closer resemblance to a debit card. The debit card, however, is tied to an account typically at a bank or credit union whereas the stored value card is not. Where do you get them? They can be obtained as a payroll card from an employer, an electronic benefit card from a government agency, or a gift card from a retail store. A multipurpose card can be applied for by telephone, online, or at check cashing outlets, money transfer company locations, and retail stores. Are there costs to using a stored value card? There are several types of fees that may be associated with the use of a stored value card. It’s important to know what these fees are to weigh the benefits of using a stored value card compared to the use of other financial services such as a checking account, credit or debit card. Generally, if the card has a high fee of one variety, it will likely have a low or no fee in another. You need to anticipate how you plan to use the card to evaluate if the card will meet your needs. Typical fees include an entrance or activation fee, a monthly or annual maintenance fee, a point of sale fee, and a within network ATM transaction fee. In addition, there could be several other fees such as a reload fee, a phone or online transaction fee, a bill payment fee, an inactivity fee, a transaction limit fee, or an overdraft fee or overdraft protection fee. In other words, you could incur a fee for putting money into your card and again when you use the card at a retailer. All of these fees can add up to a significant sum if the user is not aware of them or careful in using the card. Who uses prepaid cards? Reloadable multi-purpose cards can be an alternative to a checking account for those who do not have a bank account or are unable to open one. An employer can direct deposit the paycheck to the account or funds can be added by money wire transfer, money order, or cash. They are also used by people who don’t qualify for a credit card. No credit check is required to obtain a prepaid card. The prepaid or stored value card can be a way for parents to give a cash allowance to their teenagers while monitoring their spending habits. It can be reloaded online or over the phone. If you’re trying to rebuild your credit history after a bankruptcy, a prepaid card can be a start. Some companies offer programs that help build a positive payment history, since the timely payment of bills constitutes 35 percent of your credit score. Is your money safe? Your savings in a bank is insured by the Federal Deposit Insurance Corporation (FDIC). The same is now true for stored value cards to the extent that the funds have been placed at an insured depository institution. Gift cards issued by a retailer are not covered. If the retailer goes bankrupt (think Circuit City or Linens ‘n Things, for example), there is no guarantee of the funds on the stored value card. Some states may offer some protections or the retailer may ask the bankruptcy court to honor the cards. As with any financial product or service, the consumer needs to be informed to make the best decision as to whether it will meet his/her needs at a reasonable cost.

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