From lawyers to calling cards, prepaid services can be convenient. But they're not always cost-effective. Here are four you might be better off avoiding.
Prepaying for services is tempting – I’d rather put some items in my life on autopilot and not have to worry about them. But many so-called “prepaid services” can end up costing more. Here are four prepaid deals that aren’t really deals at all…
1. Prepaid debit cards
Prepaid debit cards are billed as an alternative for the “unbanked”: people without bank accounts or credit cards. They allow people who would otherwise be forced to carry cash or purchase money orders to pay with plastic. While they might be an alternative to cash, they have issues that make them an expensive alternative. Take the NetSpend Prepaid MasterCard for example. The card was chosen as a top pick by CreditCards.com, but look at the flurry of fees:
- Monthly fee: $9.95
- ATM withdrawal: $2.50
- Signature purchase: $1
- PIN purchase: $2
In addition to the fees, prepaid debit cards don’t help you establish credit, since they don’t report activity to the credit bureaus. If you don’t have a checking or credit account, a better idea is to get one. Check out 8 Tips to Get Credit When You Don’t Have Any or see if a bank near you offers what’s called second-chance checking accounts.
You can also find better deals with many “secured” credit cards – cards that don’t require a credit history because you put up a deposit that secures the credit limit. Check out our Credit Card page for examples.
2. Prepaid car maintenance
When I bought my last car, the dealership offered me a prepaid maintenance plan, otherwise known as PPM. Unlike extended warranties, prepaid maintenance is just what the name implies – you’re prepaying for things not covered by the warranty, like scheduled oil changes, tire rotation, air filter replacement, and other preventive maintenance. Many manufacturers already include these services as part of the purchase price, but some don’t.
In my case, the dealer wanted to charge an upfront fee of $1,150. I didn’t bite. Why? Because the dealership wasn’t offering their services at a discount, and I knew I could find a better deal elsewhere. In addition, the dealer wasn’t conveniently located.
These plans aren’t always a bad deal. Some dealerships use them to get repeat customers and are willing to offer a discount – up to 45 percent, according to this article at Bankrate. This is a decision that requires a little math and some consideration. Don’t let a salesman pressure you into a decision at point of purchase. Instead, take the information home and compare dealer prices with other shops in your neighborhood. And if you get the now-or-never pitch, go with never.
3. Prepaid legal plans
I once worked for a company that offered a benefits package with a prepaid legal plan. For roughly $25 a month, I had access to legal services – sort of. Only the most basic services were included. For example, I could get a free consultation, have a lawyer proofread my will, or get a lawyer to call a company on my behalf. But I couldn’t get a lawyer to actually write a contract or accompany me to traffic court. I still had to pay an hourly rate for that.
Most law-abiding Americans don’t use lawyers often enough to pay in advance. If you do need a lawyer, it’s likely you’ll need help with a service that isn’t covered by the plan. And even if the service is covered, you’ll probably spend less just shopping around for a law firm of your choice or using an online service. Check out 3 Tips for Lower Lawyer Bills for details.
4. Prepaid calling cards
Depending on the company, you’ll pay flat rate for each minute you buy. For example, AT&T’s virtual calling cards start at 4 cents a minute for national calls and 5 cents a minute for international calls. Sure, you’ll only pay $2.40 to talk to Aunt Ida in Ohio for an hour, or $3 to talk to a friend summering in France. But why pay for something at all if you can get it for free?
With Google Voice, you can make free state-to-state calls. With Skype, you can make free unlimited computer-to-computer international calls. Check out 4 Cheaper Alternatives to Landline Phone Service for more alternatives.