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The following is a guest post. Enjoy!
The Credit Card Dilemma: Prepaid or Not Prepaid?
If you’re asking yourself this question, it is likely that you have had a bad credit run in the past, or that you don’t qualify for credit because you’ve never had any. Prepaid credit cards offer a way for you to break the cycle of having no credit or bad credit by providing a way for you to build credit and earn the trust of your lending institution. And, because they are prepaid, they eliminate risk for the card issuer.
First, it is important to verify whether you are getting a prepaid credit card or a prepaid debit card. It may seem that the difference is all in the semantics, but prepaid credit cards help you build credit where debit cards do not. If your primary goal is to improve your financial standing, this could be a critical difference.
The Pros of Prepaid Credit Cards
In terms of the process of using it, having a prepaid credit card is just as convenient as having a regular credit card. You can get a card with any of the major issuers such as Visa or Mastercard, and you can use your card both in person and online. The only person who knows it is prepaid is you.
You may be asking yourself why not skip the trouble and just get a debit card. Prepaid credit cards may not operate on borrowed money, but they are linked to a lending institution, which gives them the opportunity to monitor your spending and payment habits. It also gives you the chance to prove that you are a credit-worthy consumer, which is why prepaid is a good way to build a path to a regular credit card.
Prepaid cards are also useful if you are trying to budget your money because they only allow you to spend what you have. If you want to break away from the “buy now, pay later” spending habit that leads to debt, a prepaid card can help you curb impulse shopping.
The Cons
of Prepaid Credit Cards
Prepaid credit cards usually have more fees than other kinds of cards, so you’ll find that it is a more expensive way to put your money to use. In addition to an initial sign-on fee, you’ll also have to pay transaction fees every time you use the card, a fee for reloading your card, and a monthly fee for account administration. And, these are just the tip of the iceberg. Considering that you’re paying all of these fees to use your own money, having a prepaid card may not be worth the expense to some.
Also, what you initially count as an advantage can quickly become an inconvenience with prepaid cards. While having a set amount of money available to spend can help you budget effectively, it can also make for an inconvenient — or worse, embarrassing — situation when you have reached that limit. The balance for many prepaid cards cannot easily be checked because they don’t operate like normal credit cards or debit cards. So, if you’re heading out to make a big purchase, it is best to check your balance before you leave home.
Conclusion
Whether you decide to get a prepaid card or not depends largely on your financial goals and your current financial situation. Like any card, it will have both advantages and disadvantages, but you can minimize the cons if you read the fine print.
How about you all? Have you ever used a prepaid credit or debit card? If so, did you incur a lot of expenses in order to use it?
If not, why have you steered clear of prepaid cards?
Share your experiences by commenting below!
***Photo courtesy of http://farm4.static.flickr.com/3050/2919245129_276a62a19d.jpg
Do you know if the pre-paid card actually builds credit (via the 3 main credit ratings agencies)? Or does it just build a relationship with whatever institution issues the card (i.e. Visa, Mastercard)?
Also, do you earn points on your purchases?
If you don’t build your credit score, or earn points, I don’t see why you would use a pre-paid card at all. Like you said, the fees alone would make it not worthwhile. You would be better off just getting a debit card at a bank or credit union.
Thanks for reading Joe and great questions. I would think that since pre-paid cards on NOT actually loans (like credit cards are), they are not reported on the actual credit report from the 3 agencies. Instead, they mainly give you a chance to develop a trusting relationship with the issuer of the card.
My recent post Saving Money on Your Health Insurance
Interesting concept on the prepaid cards, I imagine due to the fees charged that they’d only be worthwhile to those who truly have no other option to build credit. It would be interesting to know how long one would need to use a prepaid card in order for the credit score to improve. As unfortunate as it is that they charge fees for each transaction and monthly processing, that could be another way to learn how to keep a strict budget. To stay on top of things one would need to maintain a log of purchases made along with the fee for the purchase and the monthly processing fee, then check the balance just for verification. Perhaps this would be a good credit building and budgeting tool for people in college. That way they can learn how these cards work without the risk of damaging their credit!
Hi Shannon,
Unfortunately companies (Rushcard and Suze Orman) are misleading customer by promising to build credit scores. Rushcard reports to unknown source and Suze Orman to TransUnion not FICO score.
Good reading here: http://www.nytimes.com/2012/01/09/your-money/suze…
We have 1 credit card that we use, not prepaid, because they didn't exist (as far as I know) when we got it. We did not use it for anything while we were trying to fix our financial situation/education. Now I'm considering using a credit card just for the cash back incentives now that our budgeting is stable and we won't abuse our credit. Even if we did use a credit card, we pay the balance off weekly.
My recent post Biblical Finances: You Have To Plan
Great to hear James! I'm also pretty adamant about paying off my credit card balances each week!
My recent post Saving Money on Your Health Insurance
I like my credit cards because of the points that I receive. I will always stick with them. Prepaid are good for those with low credit scores.
My recent post How Would You Spend a Million Dollars?
Well said James! I really like my credit cards because I get cash back rewards on them.
My recent post Saving Money on Your Health Insurance