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The pros and cons of prepaid cards

As the credit crunch tightens, we're all looking for new ways to pay at the register, along with some fresh ideas for cutting our budgets.

Now an old form of plastic is regaining its popularity. Contact 13's Tricia Kean explains the benefits and pitfalls of prepaid cards.

Amanda Morin was hoping to cut back on her massive monthly grocery bill, so she decided to limit her purchases by using a prepaid credit card loaded with less than she usually spends.

"We've been pleasantly surprised in that we actually have come under budget and saved $150 a month," said Amanda.

The cards are ideal for those with bad credit or low bank balances and their popularity is rising.

Last year, nearly $4.1 billion was deposited onto reloadable cards. That number is expected to top $14 billion by 2011.

"These cards, because they're loaded with the consumer's own funds, require no checks or balances," said Tim Sloane, director of Prepaid Advisory Practice from the Mercator Advisory Group.

The cards can be purchased in a variety of banks and retail stores and are backed by major issuers like Visa, Mastercard and Discover.

They work like regular credit cards, except you can only spend what is deposited on them. Experts say you need to consider all the fees involved.

"You need to pay money to be able to acquire the card, and then there is a range of potential fees on the back end of that card that might be around a reload fee, a fee for using it at the ATM," said Tim.

Pre-paid cards come with the same loss protection as traditional credit cards. So if the card is lost or stolen, your money is protected

The process to dispute charges for unauthorized purchases or defective merchandise is harder.

"You have to look at the fine print that is associated with the card to understand what that issuer determines their role is in working a dispute with an individual merchant," said Tim.

So far, Amanda hasn't encountered any problems and says for her family, prepaid is the way to go.

"You don't have to worry about whether there's funds in your bank account. You just slide and use it like any other card," said Amanda.

The Contact 13 bottom line is that pre-paid cards do not reflect on your credit score, at least not yet.

Industry groups say there are plans to allow consumers with damaged credit to receive small loans on these cards.

By paying the loans back they'll rebuild their credit and get back on their feet.

Keep it tuned to Channel 13.