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How Do Prepaid Credit Cards Work?

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If you have bad credit or want to avoid using traditional credit or debit cards, you might consider getting a prepaid credit card. Prepaid cards are easy to obtain and require no credit check. You can use prepaid cards online or when you can’t pay in cash, but they won’t help your credit score.

“Prepaid cards can be purchased at banks, discount (stores) and convenience stores,” says Mike Sullivan, personal finance consultant with Phoenix-based Take Charge America, a nonprofit credit counseling and debt management agency. “They can be obtained quickly and cheaply.”

What Is a Prepaid Credit Card?

Prepaid cards are different from traditional credit cards, even though they might carry the Visa, Mastercard, Discover or American Express logos. Rather than tap a line of credit, prepaid card users spend only what they load onto the card.

How do prepaid cards work? Prepaid cards actually work a lot like bank debit cards. Each transaction reduces your cash balance, but unlike a conventional debit card, a prepaid card is not tied to a bank account. You can use some prepaid cards to withdraw cash from an ATM, but you can only withdraw up to the amount loaded onto the card.

Some prepaid cards are reloadable — meaning you can add money to the card multiple times — while others are not.

“You actually are spending your money,” says Paul Golden, director with the National Endowment for Financial Education in Denver. “This is not money that’s being lent to you like with a credit card.”

[Read: Best Credit Cards for Bad Credit.]

Compared with traditional credit cards, prepaid cards can make it harder to go into debt because many prepaid cards will not authorize purchases that exceed the amount loaded on them. Those that do allow you to go over your limit may charge an overdraft fee, although new federal rules limit these fees. Keep in mind that you can go over your limit if you have a low balance and a separate card fee puts you in the red.

Different Types of Prepaid Credit Cards

Prepaid cards fall into two major categories:

Open loop. This type of prepaid card is branded with the logo of a network, such as Visa, Mastercard, American Express or Discover. You can use these cards anywhere the brand is accepted.

Closed loop. You can only use this type of prepaid card in specific places, such as at a particular store or group of stores.

Employers may issue reloadable open-loop cards to employees to provide pay and benefits more easily. “Some employers even offer the option of having payroll delivered to unbanked employees via prepaid cards,” Sullivan says. These are also known as payroll cards.

Government agencies also may use open-loop cards to pay benefits , such as unemployment insurance.

The Pros of Prepaid Credit Cards

You can use the cards to put the brakes on spending. Prepaid cards can be a great tool for consumers who struggle to live within their financial means. “Prepaid cards are useful in helping control spending and managing expenses,” Golden says. You can use them to set a budget for particular expenses that you may be more likely to stick to than with a bank or credit card account.

No approval is required. The cards make sense for consumers with poor credit who can’t get approved for a credit card. “There’s no credit check to get a prepaid card,” Golden says.

The cards are more secure than cash. Prepaid cards offer a way to access money without carrying around a wallet full of bills. In April, rules from the Consumer Financial Protection Bureau went into effect that give prepaid cardholders some of the same protections that debit cardholders have.

Now, consumers who report that their cards are lost, stolen or fraudulently used in a timely way are entitled to a company investigation of their claim, reimbursement for unauthorized charges and correction of errors. The new rules apply to prepaid accounts, which range from prepaid plastic cards to money in mobile and internet-based accounts.

To ensure that you have these protections, you must register the prepaid card, either when you purchase it or later online or by phone.

The cards make great teaching tools. One of the most overlooked benefits of prepaid cards is that you can use them to teach children how to manage their money. “It can be an effective tool to get younger kids interacting with plastic,” Golden says.

It’s an easy way to give money. Prepaid cards can make excellent gifts, Sullivan says. Unlike store-branded gift cards, open-loop prepaid cards can be used anywhere the network’s cards are accepted, making them a more flexible option than traditional gift cards.

The Cons of Prepaid Credit Cards

While prepaid cards have perks, they also have a few drawbacks.

If you don’t register your card, you may be limited in how you can use it. Before using a preloaded card, you may be required to register it with the card provider to access all of its features. If you fail to do so, you may not be able to add more money to it, use it online or withdraw funds from an ATM, for example.

You might pay fees to use the card. “Prepaid cards are not perfect,” Sullivan says. “There is a cost to buy them, and there can be expenses involved in using them.”

Among other costs, you might pay:

— Fees for each purchase

— Inactivity fees

— Fees to reload or replace the card

— Activation fees

— ATM fees for transactions or balance inquiries

— Customer service inquiry fees

— Overdraft fees

[Read: Best Starter Credit Cards.]

Sullivan notes that “the most predatory cards” may charge a monthly fee simply for keeping the card active.

Prepaid cards do not report to the credit bureaus. As a result, they do not allow you to build a credit history. Prepaid cards won’t help you establish or repair credit, except as a tool to control spending.

The cards aren’t always accepted. Prepaid cards typically are accepted wherever credit cards can be used. But Golden says you might run into challenges if you try to rent a car or reserve a hotel room with a prepaid card. Rental car companies or hotels may ask you for a cash deposit or place a hold on prepaid card funds.

You may only be able to spend what’s loaded on the card. While some prepaid cards allow overdrafts, others do not offer any way to make a payment if your expense exceeds what is on the card. “If the card does not have enough value for a transaction, the transaction will be denied,” Sullivan says.

The cards come with limited consumer protections and benefits. Credit cards may offer cardholder benefits and account protections, such as zero liability for unauthorized charges, extended warranty coverage or travel insurance. Prepaid cards don’t offer the same level of benefits or protection.

Can you use prepaid credit cards online? Yes. Most of these cards are branded with a network logo — such as Visa, Mastercard, American Express or Discover. These cards can be used anywhere the brand is accepted, including for online shopping.

While prepaid cards offer the same protections as debit cards, these are more modest than the protections you get when using credit cards. For this reason, experts generally recommend using credit cards when transacting online.

They provide less rewards potential. Prepaid cards may not offer rewards, and if they do, they’re usually at lower rates than credit cards.

Choosing the Right Prepaid Credit Card

Read the agreement that comes with your prepaid card to make sure you understand the card’s limits and fees.

“Prepaid cards are not created equal,” Sullivan says. “Buyers must be careful when selecting a card.”

The CFPB requires prepaid card issuers to provide disclosure forms that clearly state the fees. Fee schedules must be made available on the company’s website and can be found on the CFPB website.

Some fees are especially worth avoiding, Golden says. He cites cash withdrawal fees and monthly service fees as being particularly egregious. “It’s up to the consumer to really understand where all the fees are assessed and if you’re able to avoid those fees,” he says. “And if not, then that’s probably not the right product for you.”

The funds attached to some prepaid cards are insured by the Federal Deposit Insurance Corp., but not all prepaid cards are covered, and some may have requirements such as registering the card. If such coverage is important to you, call the issuer to inquire about it before purchasing a card.

Also, some cards can be used outside the U.S. Others cannot, or the card will charge foreign transaction fees when used outside the country.

Alternatives to Prepaid Credit Cards

Although prepaid cards might make sense for some consumers, other options could be a better fit, including:

— Secured credit cards

— Cash

— Money orders

— Debit cards

[Read: Best Secured Credit Cards.]

Because prepaid cards do not have a line of credit attached to them — and because your spending activity with them is not reported to credit reporting agencies — they will not boost your credit score.

Consumers hoping to build or rebuild a credit history might be better off with a secured card. This type of card allows you to make a deposit with a credit card issuer in a specific amount that acts as collateral. Your credit limit is typically the amount you’ve deposited. The deposit isn’t used to pay your bill. You’ll be required to pay back what you owe with at least a minimum payment each statement period.

Your security deposit lowers the risk for the issuer and makes getting approved for the card easier for you, even if you don’t have good credit. Secured credit cards typically report your account activity, including payments, to the credit bureaus. Regularly paying your secured credit card bill on time can help you build a positive credit history.

“Where a prepaid card is not going to help you build a credit history, a secured card may,” Golden says.

But with secured cards, the upfront expense can be a problem. While you can typically purchase a prepaid card for less than $5, secured credit card deposits range from $200 to $500.

Nevertheless, a secured card can be a powerful tool for getting your financial life moving in the right direction. Once you’ve established a good payment history with a secured credit card, you may get a credit limit increase, which might require a larger security deposit, or an upgrade to an unsecured credit card and your security deposit returned.

Other alternatives to prepaid cards include cash, money orders and a debit card. A traditional debit card is one of the best alternatives to prepaid cards, Golden says. However, getting a debit card requires having a relationship with a bank.

“There are a lot of people who use prepaid cards who want to avoid banks for whatever reason,” Golden says. “Maybe they were hit with overdraft fees and a lot of other fees, and they just ended up closing their account rather than put up with it anymore.”

Golden says he understands that some people are reluctant to take that step if they have had a negative banking experience in the past. But some comparison shopping can help you find a bank with low fees and the customer service you need, he says.

In the end, knowing yourself and your needs is the best way to determine whether prepaid cards are right for you.

“It all comes back to shopping around and doing your homework,” Golden says. “First, map out what your goals are. That’s going to help you decide which product is right for you.”

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Early Termination of a Car Lease

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If you’re leasing a vehicle in order to save money, but are thinking of terminating your lease contract early, you may want to think twice. Leases aren’t always as easy or as affordable to get out of as auto loans.

Can You Terminate Your Car Lease Early?

In most cases, you can get out of an auto lease early, but you may not be able to do it cheaply.

Leasing typically comes with fees both at the beginning and end of your term. However, if you need to get out of your lease early, there may be early termination fees (ETF), making the cost more than you bargained for.

Additionally, lessors often require you to pay all your remaining lease payments in one lump sum before releasing the contract early. Costs involved with getting out of your car lease early may also include:Early Termination of an Auto Lease

  • Excess mileage charges
  • Wear and tear fees
  • Any taxes not yet collected
  • Any negative equity
  • Storage and transport fees
  • Pay the cost of sale preparation

Check your lease contract to see if your lessor has any charges for terminating your lease early, or if there are stipulations that prevent you from getting out of the contract before a certain time. Even if there are extra fees imposed on you for returning your leased vehicle early, it might be easier to terminate a lease nowadays than it’s been in the past.

Since the pandemic, many dealerships and lenders have pushed into the digital realm to get business done. This includes video conferences to meet with dealers that typically needed to be done in person in the past. Of course, your vehicle still needs to be turned into a franchised dealership to be inspected and processed before a leasing company allows you to terminate your lease contract early.

Is it Worth it to Terminate Your Lease?

The first step is to look at your leasing contract and see if you even can get out of your lease early, and how much it’s going to cost you in ETFs. Then, you need to gather the following information:

  • Your monthly lease payment amount
  • How many payments you have left on your contract
  • The residual value of the vehicle

To figure out a good ballpark figure for getting out of your leased vehicle early, add together the cost of your remaining lease payments and any ETFs. To see if it’s worth it, compare this figure with the buyout price at the end of your lease, and find out what the current market value of the car is by checking sites like Kelley Blue Book and NADAguides.

Depending on how close you are to the end of your lease term, if the buyout price on the vehicle is significantly lower than the early termination price, it may be a good idea to wait it out. Then, once you buy out your lease, you can trade in the car for something else.

If you decide not to wait, how you handle getting out of your leased vehicle early could depend on the difference between the current market value of the car and the residual value of the vehicle as predetermined in your leasing contract. If the car has more value than the lessor predicted, you may be able to sell it for enough to pay your way out of your lease early.

Three Options for Terminating Your Lease Early

If you’re looking to get out of your lease early, for whatever reason, you typically have three options:

  1. Sell your leased car to a dealer – Selling your leased car to a dealer is similar to doing a trade-in, except they pay off your lease contract, including the early termination fees. It’s typically a pretty easy process, especially since used vehicles are in high demand since the pandemic. You may be able to get a little more for a car that’s coming off a lease since the turnaround time on a sale is likely to be shorter, depending on demand. If this is the case, you may even be able to walk away with some cash in hand depending on if the dealer’s willing to pay more than the lessors estimated residual value on the vehicle.
  2. Have someone else take over your lease – Lease assumption isn’t always something you can do, but in many cases, you can transfer your lease to someone else, as long as they meet all the lessor qualifications and there’s equity in the vehicle.
  3. Lease buyout – With the demand for used vehicles at affordable prices up right now, you may be able to buy out your lease then sell the car privately as long as you get enough money to make it worth your while. If you can’t come close to selling it yourself for the amount you need to pay off your lease, including ETFs, it may not be worth it to try and get out of the vehicle early. Most leasing companies allow for some form of early lease buyout, but again, it may cost you those extra fees.

If Leasing Isn’t for You

Now that you’ve figured out whether it’s worth it or not to get out of your lease early, it’s time to decide what to do next when it comes to getting a vehicle.

If you didn’t mind leasing but the car just wasn’t for you, you likely have the option to swap into another lease on a different vehicle with the same company. Many lessors contact lessees toward the end of their contracts to see if they’d be willing to get into another car lease early.

However, leasing isn’t for everyone. If you found that the restrictions that come with it such as the mileage limitations, or cost of maintenance and repairs are too much for you to handle, it may be time to consider an auto loan for your next go-round. If this is the case, Auto Credit Express wants to get you started on the path toward your next vehicle.

We’ve gathered a nationwide network of special finance dealerships that are signed up with lenders to help people with credit challenges. Whether you’re just not sure where to start or you need a little help due to bad credit, start here. By filling out our fast, free, no-obligation auto loan request form, you’re taking the first step toward finding your next car loan without all the hassle of searching. Get started right now!

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GSB focuses on social responsibility

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State-owned Government Savings Bank (GSB) has focused on providing loans to people without a record in the National Credit Bureau system or with bad credit over the last year to help those impacted by the pandemic deal with unprecedented economic hardship.

GSB president and chief executive Vitai Ratanakorn said the bank has extended loans to people with no credit history who have never borrowed from commercial banks or non-bank institutions.

He said the bank had already provided 1.5 million loans to members of this group of people.

The bank has also provided loans to 200,000 people with bad credit records.

Mr Vitai said the lending was aimed at drawing those outside the credit bureau system into the system and enabled them to get access to the loans, which was one of the main roles of state-run banks. This lending has been supported by the government.

He said this lending was not aimed at seeking profit as GSB charged a low monthly interest rate of 0.1-0.3%. For example, if the bank provided a 10,000 baht loan to a person under this scheme, it would only gain interest income of around 120 baht per year.

In addition to its objective of becoming the country’s genuine social bank, GSB’s other goal this year is to prevent loans from becoming bad debts, he said. The bank will rush to help customers in danger of accumulating bad debt to restructure before it reaches that stage.

Mr Vitai said GSB will not focus on growing its loan portfolio during the first six months of the year, but on serving the state’s policy of helping people and business operators cope with the impacts from Covid-19. Grassroots people and small and medium-sized enterprises are suffering the most from the pandemic, he said.

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How to Start Over When You’ve Lost Everything

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Upset women laying on the wood floor of her living room and petting her dog.

Image source: Getty Images

When you’re down to nothing, you have everything to gain.

People start over for many reasons, including job loss, divorce, illness, and business failure. Whatever the reason, if you’re starting anew, here are some steps to take in rebuilding.

Acknowledge the twist

Remember that you’re not starting from scratch. The fact that you’ve lost assets means that you had assets to lose. Whether that’s a retirement account, home, or business doesn’t matter. You know what it’s like to work for — and achieve — something. You did it once; you can do it again.

Establish credit in your name

If you don’t have much credit in your name, establish your own healthy credit file by taking out small amounts of credit and paying them off like clockwork each month. If your credit score has taken a hit, apply for a credit card for people with bad credit, use it to make small purchases, and pay it off each month before the bill comes due. Or you might ask someone you’re close to to add you as a user on their credit card. Your credit score gets a boost each time they make a payment, even if you never touch the card yourself.

Invest right away

The sooner you begin, the faster you can recoup losses. Maybe you can’t invest as much as you once did. That’s okay. Something is better than nothing, and you can add to your investment pot over time. The more time compound interest works its magic, the better. Every dollar helps, whether you plan to retire in 10 years or 30.

If you’re employed by a company that matches a percentage of 401(k) contributions, do whatever you can to contribute at least that much. The matching funds are basically free money.

Let’s say you earn $60,000 annually, plan to work 15 more years, and your employer matches up to 5% of your contributions. Here’s how much you’ll have put away with just your 5% on its own:

Annual Income

Percent Contributed

Amount Contributed

Average Annual Rate of Return

Time Until Retirement

Value At Retirement

$60,000

5%

$250/month, before taxes

7%

15 years

$75,387

Since your employer also matches that 5% of your income, you’ll have $150,774 instead.

If you were to raise your pre-tax contributions to 10%, here’s how it would look instead:

Annual Income

Percent Contributed

Amount Contributed

Average Annual Rate of Return

Time Until Retirement

Value At Retirement

$60,000

10%

$500/month, before taxes

7%

15 years

$150,774

Including the additional 5% contributed by your employer, you would have $226,161 at 15 years. It’s not a fortune, but could be very helpful. By the way, if you don’t touch it for 20 years, that nest egg would be worth nearly $369,000. If you don’t plan to retire for 30 years, it will be worth more than $850,000.

If you’re not with a company that matches contributions, find a brokerage firm that supplies the level of education and direction you’re looking for and get started.

Get professional help

After financial trauma of any sort, it’s tempting to invest aggressively. While in some circumstances it could be an effective way to make up for losses, it may not be the best move if you’re closing in on retirement. Consider working with a financial advisor, even if it’s on an hourly basis and you pay only for their time helping you come up with a smart investment strategy.

Postpone Social Security

One thing my husband and I (and many of our friends) have done is raise the age at which we expect to retire. We don’t see it as a sad thing. I never want to stop working, and now that my husband is in a job that tickles him, he’s not in a hurry either. The minimum age to retire is 62, but if you can wait until you’re 70, you max out your monthly Social Security payments.

Find support

Millions of people have made money, lost money, and started over. Chances are you already know a few people who’ve redesigned their lives from the bottom up. Talk to them. Ask them what they learned from the experience. If they had it to do over again, is there anything they would change?

People who experience hardship often have the best stories to tell and are often an excellent source of inspiration. It may not be easy now, but with luck, you can look back one day and say, “Hey, I did okay — despite the unexpected setbacks.”

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