Editorial Policy

Prepaid Credit Cards

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By Eva Norlyk Smith, Ph.D.
May 22, 2009

Prepaid credit cards are similar to debit cards—to use the card, you must first load value onto the card via direct deposit or a transfer of money from a bank. Every time you use the card, the amount of your purchase is deducted from the balance. Some issuers refer to the card as a stored value card. You can only make purchases up to the amount stored in the card.

A prepaid card essentially gives you a means to convert your money into electronic currency, giving you easy access to money without having to carry cash. It is different from a regular debit account in that it is not tied to a checking account; you simply load value to the card directly.

Here are some of main advantages of prepaid credit card:

  • It offers the same purchasing conveniences as a credit card. It is safer to carry than cash, and it enables you to shop online, rent cars, make travel reservations, and pay your bills online or over the phone.
  • It builds financial discipline. Unlike standard credit cards, with a prepaid credit card you can’t spend money you don’t have, so you don’t have to worry each month about how to pay your credit card bill. In this way, a prepaid card helps keep you out of debt.
  • It can help you qualify for an unsecured line of credit. In many cases, a prepaid credit card enables you to build a relationship with a lender, which in turn may qualify you for an unsecured line of credit down the road. Some prepaid card issuers will review your card history on a regular basis, e.g. every 90 days, and based on that may consider you for a traditional credit card with a line of credit.
  • More convenient than a checking account. Most users find that a prepaid credit card gives greater convenience than a checking account. It has a wider range of uses, is more universally accepted, and you won’t have to worry about bounced checks and overdraft fees. If there is no money in the account, your purchase will simply get declined at the point of sale.
  • Most cards guarantee acceptance. In most cases, anyone over 18 can apply and get accepted for a card, irrespective of their credit rating and credit history.

One disadvantage of prepaid credit cards, of course, is that they don’t give you access to a line of credit; you can only spend your own money. But if you are already in debt, that might not be such a bad thing.

Another disadvantage is that in many cases, you pay considerable fees for the convenience of having a card. Typical initial fees include a start-up fee, a processing fee, and an activation fee, which for some cards total in excess of $150. In addition, most cards have a variety of maintenance fees, which over a year can total a considerable amount of money.

The fees that you pay for prepaid cards vary widely from issuer to issuer, so do your homework before applying for a card and study the fine print carefully before you select the offer you feel best fits your need.