Pre-paid Phone Cards

For consumers who either do not have a home phone or need to make phone calls when away from home, prepaid phone cards can offer ease of use, convenience and savings. While there are numerous such cards to choose from, not all cards are created equal. Nor are all cards problem free. Virtually unheard of in this country just five years ago, today prepaid phone cards are available just about everywhere in the United States. Such cards enable consumers to make calls when away from home or office. The cards can be used at just about any touch-tone telephone, as well as at pay phones. The cards eliminate the need to carry coins for pay phones, allow persons without a local telephone service account to make calls, and generally cost less than traditional collect, third party and telephone company calling card calls. Prepaid phone card calls are also cheaper than most long distance calls made with coins from a local telephone company pay phone. However, like many new consumer products, prepaid phone cards are not trouble free.

Prepaid phone cards originated in Europe in the late 1970's as a method of reducing vandalism of pay phones and are widely used overseas. In the United States, prepaid phone cards hit the market in the early 1990's, mainly as promotional items. The direct marketing of such cards to consumers is recent, but has grown at a staggering rate.

Today prepaid phone cards are produced by hundreds of companies, ranging from major telephone companies and credit card issuers to extremely small start up businesses. The cards can be purchased in small denominations (typically, $5 - $20) at most major transportation facilities such as airports, at many convenience stores and newsstands, and at a variety of other locations, such as gas stations, drug stores and even United States Post Offices.

While prepaid phone cards offer convenience, the real attraction of such cards for consumers is the possible savings compared to traditional ways of making calls away from home or office. Many consumers do not have the information about the cards that they need to make informed purchases. For this and other reasons consumers have had difficulties with some cards.

A prepaid phone card is really just a way of paying for telephone service in advance by establishing an account with a card issuer. The card itself has no value. What are valuable on a prepaid phone card are the "personal identification number" or "PIN", and the card issuer's toll free telephone number printed on the card.

To use a prepaid phone card, the person wishing to make a call dials the card issuer's toll free number. This call is connected to a computer operated by or for the card issuer. The computer contains accounts identified by PINs. Each computer account contains a specific dollar amount of credit that can be used to pay for calls made through the card issuer's telephone service.

After the caller dials a valid PIN, the caller can dial the local or long distance number the caller wishes to reach. The card issuer's computer times the length of the call, and deducts an appropriate charge from the account each minute until the account does not contain enough credit for another minute or the caller hangs up. If the call does not use up all the credit in the account, another call can be made until the account contains too little credit to pay for even a one-minute local call.

Most prepaid phone card systems give callers a verbal report of the amount of credit remaining in an account after the PIN for that account is dialed. This information can be used to determine what a call costs, and if a call is timed can be used to figure out the card issuer's rates.

Many prepaid phone card systems provide a second verbal message after the caller dials the number the caller wishes to reach. This second message tells the caller how long the caller can talk until the credit in the prepaid phone card account drops below the minimum required for a minute of service to the number dialed. For example, at 25 cents per minute for local calls a $3.10 credit would permit a twelve-minute call; at $1.45 per minute the $3.10 credit would permit a two-minute long distance call. If provided, this second message makes it much simpler to figure out a card issuer's rates.

A significant feature of prepaid phone cards is that callers frequently are unable to use all the credit in a card account. In the example above, the card has $3.10 of credit. If the caller made a twelve-minute local call the card would have 10 cents in credit left. If the caller made a long distance call for which the charge was $1.45 per minute, the card would have 20 cents in credit left. In both instances no more calls could be made with the card because the card issuer charges a minimum of 25 cents per minute.

For all their potential benefits to consumers, prepaid phone cards have their problems. Consumers, retailers, and wholesalers have been stuck with cards that do not work. Prepaid phone cards can fail to work for a variety of reasons, including the shut down of the business that issued cards. It is clear that one of the major concerns about prepaid phone cards is whether a given card will actually deliver telephone service.

In addition to the fundamental question of whether a prepaid phone card will work at all, the Attorney General identified several other concerns about the cards. These concerns fall into three categories - information available to consumers before they buy a card, the quality of the service that a card provides, and the value that a card delivers.

Prepaid phone cards are being targeted to compete with traditional telephone company calling cards, and to appeal to consumers who do not have telephone service in their homes and must use pay phones. For most calls the cards offer lower rates than traditional telephone company calling cards. Prepaid phone card rates for both domestic and international calls are lower than coin charges at pay phones. In addition, prepaid phone cards make carrying coins unnecessary and allow callers to use most touch-tone telephones, thus avoiding the inconvenience of having to locate a pay phone. These features make prepaid phone cards attractive to many consumers.

The major disadvantages of prepaid phone cards are that buying cards involves some risk that the card will stop working before it is completely used, that some cards make unexpected or unexplained charges, that service may be slow or poor, and that few cards provide adequate rate information to enable a consumer to make an informed choice before buying a card. However, the cards' disadvantages counsel caution rather than avoidance. The potential savings from the cards, especially for making long distance calls away from home, are such that many consumers may benefit from using them.

Consumers would benefit from greater disclosure of information about prepaid phone card rates. One should make sure that prepaid phone card issuers disclose relevant information, including their rates, in ways that enable consumers to make informed purchases of their cards.

Finally, the incidence of prepaid phone cards that do not work, the nature of many claims for the cards, and certain problem charges indicate a need for further examination of this emerging industry.