Pre Paid Credit Cards:
The one thing it's bad for.

pre paid credit cards Photo courtesy of mtodd

Pre paid credit cards are an alternative for individuals who have no credit cards due to bad debt or no debt at all. But, there is one thing you need to know about these cards before you buy...because you could be wasting your time.

These days, it's hard to live without a credit card. Among the advantages of credit cards, more and more vendors are accepting it. Unfortunately for some, a lot are requiring it. Things like car rentals, hotel reservations, and airline bookings all require plastic currency.

If you don't have a credit card, then pre paid credit cards are a great solution. They are essentially gift cards with the VISA, MasterCard, or American Express logo on it. If the vendor accepts these brands, you'll have no problem using your branded pre paid credit card.

How They Work

Deposit

First, you deposit money into the card, sort of like a gift card. As you use your card for purchases, that amount reduces your balance.

So, for example, let's say that you deposited $500 onto your card. You run off and buy a doodad like a brand new pair of shoes for $100, using your shiny new card.

That $100 is deducted from your balance and now you have $400($500-$100) left to spend on your card. As soon as your balance hits $0, your card can no longer be used until you deposit more money onto it.

Seems straight forward. But there are...

Costs

An AccountNow Pre Paid Visa Credit Card has additional fees that can eat away at your balance. Listed are potential fees:

  • $1 each transaction
  • $1 per cash withdrawal
  • $2.50 for ATM withdrawals
  • $4.95 initiation fee (one time only when you sign up)
  • $9.95 monthly fee

You can see how quickly these additional fees and charges (eroding factors of money) can deplete your balance.

How Useful

If your bank doesn't offer credit cards with the major brands like VISA, MasterCard, or American Express, a pre paid credit card is a good option.

Looking to get your child his or her first credit card? I would highly recommend using these cards if you are teaching your child about money, budgeting, and other financial skills.

These are also great credit cards for students, if you're simply wanting to limit their spending and teach them how to use plastic currency. You simply load the card up and the students can pay for food, supplies, and beer...I mean books.

The great thing is that since they are not traditional credit cards, they can't overspend the balance (whew!). And, you can easily monitor their spending.

How about this:

  • No interest
  • No finance charges
  • No late payments

Sometimes you are the student and you want to learn about personal debt management. Since you won't have to worry about interest, finance charges, and late payments, this makes these cards a great learning tool. There's no sense in losing additional money while you're learning.

The Major Drawback

A pre paid credit card does not help you improve, or establish, your credit. As I said before, it's a great alternative if you have bad credit or no credit, but it will not help you fix your credit score.

These cards do not report to the credit bureaus. You are better off getting a secured credit card.

With secured credit cards, you make a similar deposit onto the card. But, it’s actually a credit card. The deposit acts as collateral in case you don’t pay your credit card balance. In a way, this helps keep you accountable and strengthens your borrowing skills.

Use the information above as a guideline. We've detailed some pros, cons, benefits, and drawbacks. But like a all financial decisions, it depends on your situation.

Pre paid credit cards are a good option if the situation calls for it. Or if you're like me...you just hate carrying cash!

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