The Pros and Cons of Prepaid Credit Cards

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What looks like a credit card, is often called a credit card, serves the same purpose as a credit card but isn't really a credit card?

Answer: A prepaid credit card.

A prepaid credit card—sometimes called a prepaid debit card—can be an alternative for people who either can't get a regular credit card or who want to control their spending. After you load the prepaid credit card with a certain amount of money you can keep using the card until that money is gone. You'll have to add more money if you want to use it again.

Advantages to prepaid credit cards:

  • You don't have to go through a credit check. As long as you have the money to put onto a prepaid card, you can get one.
  • Prepaid cards offer the same convenience as using a credit card, and are usually accepted wherever credit cards are accepted.
  • You won't overspend with a prepaid credit card, and you won't have to pay interest on whatever purchases you make.
  • They may be a good way to introduce a young person to the concept of using a credit card without allowing them to get deeply into debt. (It does not teach them about important credit card concepts like late fees, minimum balances, and annual percentage rates, however.)
  • Some prepaid cards may offer discounts or cash back on certain purchases (such as gasoline). Others may offer a discount on prescriptions, or some kind of roadside assistance benefits.

Disadvantages to prepaid credit cards:

While there are benefits to using prepaid credit cards, it's important to realize that there are some very real financial disadvantages to using them:

  • Fees, fees and more fees. When you apply for a pre-paid credit card, you'll need to pay a sign up fee. After that you may have to pay a fee each month (and these can get high) and a fee each time you want to reload the card. (If you opt for direct deposit onto your card from your paycheck these monthly fees may be waived.)

    You may have to pay a fee if the balance on the card gets below a certain level or if you use the card to withdraw cash from an ATM more than once a month. Some companies even charge if you use an ATM to check the balance on your card. You may get charged an inactivity fee if you don't use the card frequently enough.

    These additional charges can add up quickly, so be sure to calculate just how much all those charges are going to cost you.

  • You're not building a credit record with a prepaid credit card. If you're going to want to apply for a car loan or some other kind of loan down the road, a prepaid card is not going to help you establish that you can handle credit.
  • You usually don't have the same protection that you do with traditional credit cards. With many companies, if your card gets lost or stolen, you're simply out of luck.
  • You won't have the financial cushion that a regular credit card can offer. If your car breaks down and needs $500 in repairs and you only have $450 on your prepaid credit card, you're out of luck until you can load more money onto the card.
  • It can take a few days after you put money on a card before you actually have access to it.

Before you decide to get a prepaid credit card, be sure to read all the terms of the card agreement carefully. You may also want to check out the Federal Deposit Insurance Corporation’s Consumer News article on Prepaid Cards.

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