Pros and Cons of Prepaid Credit Cards

Their advertisements call prepaid credit cards an alternative to regular credit cards. Prepaid credit cards are thought of as something you get when your credit isn’t good enough to qualify for a regular credit card. While they behave similarly, prepaid credit cards are definitely different from regular credit cards.

A prepaid credit card isn’t a credit card at all. From now on, we’ll just call them prepaid cards because that’s what they are. A credit card extends credit to you in the form of a credit limit. When you make purchases on your credit card, your balance goes up and your available credit goes down. You must make a payment to avoid certain penalties and get more available credit.

A prepaid card does not extend credit. Instead, the prepaid card simply lets you access funds that you’ve deposited into an account. When you make a purchase by swiping a prepaid card, the funds are deducted from your balance. You aren’t required to make payments, but you do have to deposit more money onto the card to continue using it.

You can think of a prepaid card as a debit card or check card that’s tied to your checking account. Prepaid cards are even different from cards associated with a checking account because you can’t overdraft with a prepaid card.

Prepaid cards don’t affect your credit because they’re not included on your credit report. An advertisement that promises a prepaid card will help you rebuild credit is misleading you. Prepaid cards can help you learn to control your plastic-based spending, but the principles of using a prepaid card are still much different from those of using a credit card.

Why would anyone get a prepaid card? If you don’t qualify for a credit card (and you don’t have a check card or debit card), you can apply for a prepaid card to make credit card-type purchases. For example, a prepaid card can come in handy if you need to reserve a hotel room or rent a car.

Some employers allow you to access your pay through a prepaid card. Rather than give you a paper check, the employer can direct deposit your pay onto the prepaid card. You can then use your card to make purchases and pay bills.

You also eliminate the risk of over-drafting a checking account if you use a prepaid card since the card would be declined if you don’t have enough money. Note that starting August 15, 2010, banks must decline transactions that would cause you to overdraft unless you’ve expressed that you would like to have these transactions processed.

You don’t have to apply for a prepaid card the same way you apply for a regular credit card. These cards can be purchased from a retailer, like Wal-Mart, and loaded with funds. You can reload the cards at the place of purchase, online, or over the phone.

You do have to be careful about the fees charged by prepaid cards. They sometimes come with application fees, monthly processing fees, along with fees to check your balance, load more funds, or speak to a customer service representative. There are several prepaid cards on the market, so review a few of them before you make a final selection.