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The Lowdown on Prepaid Credit Cards

There are many situations where not having a credit card is an inconvenience. Car rentals, hotel reservations, and airline bookings all require a credit card and if you can't get one because of limited or bad credit, then you're in a bind. This is where a prepaid credit card can be beneficial.

Prepaid credit cards are simply Visa, MasterCard, or American Express branded gift cards that are loaded with money and used where credit cards are accepted.

You may want to consider a prepaid credit card if you don't have a credit card and your bank doesn't carry Visa- or MasterCard-branded debit cards. This will allow you to spend money as if you had a credit or debit card instead of using cash for your purchases.

How prepaid cards work

Pretty basic stuff - you deposit money onto a prepaid card, similar to a gift card. You use your prepaid card for purchases and the amount is deducted from the balance on the card. Once you've used your entire balance, you can no longer use the card until you reload more money onto it. It's as simple as that.

If you can manage a checking or savings account, then you can manage a prepaid credit card. All you need to know is how to subtract. You don't have to concern yourself with interest rates, finance charges, late fees, available limits or revolving balances as you would with a conventional credit card.

Prepaid cards come with fees

Unfortunately prepaid cards aren't free. There are several fees associated with these types of cards. If you choose to use a prepaid card you need to be aware of the following fees you could incur:

  • Activation
  • Monthly transaction
  • Making PIN purchases
  • Withdrawing money at an ATM (separate from the ATM fee)
  • Checking your balance at an ATM
  • Talking to the card issuers customer service department

Each time you incur a fee, it is deducted from your balance, leaving you less money for actual goods and services.

Prepaid cards won't help you build credit

Credit histories are not considered when it comes to prepaid cards; anybody can get one. Consequently, prepaid cards won't help you establish or rebuild credit either. Because these types of cards aren't based on credit, they do nothing to demonstrate one's ability to manage credit and repayment habits, so prepaid card issuers don't report to the credit bureaus.

To help establish or rebuild your credit, a secured card is what you need instead. A secured card is similar to a prepaid credit card in that you have to make a deposit to get the card, but different in that it's actually a credit card. The deposit acts as collateral in case you don't pay your credit card balance. Using a secured card does demonstrate payment habits and management skills which are reported to the credit bureaus and will affect your credit status.

Prepaid cards are simply a substitute for cash

They are also great for teaching children money management skills. Parents can load money on the card for their young kids and begin teaching them about budgeting and balancing. Prepaid cards are also good for college students who need to pay for expenses while they are away from home. Parents can easily reload money onto the card allowing the students to pay for books, food, and other expenses.