If you need a credit card but can’t get one because of poor credit, are worried about the temptation to overspend or don’t trust banks, prepaid credit cards may be the answer for you.
Prepaid credit cards are similar to secured credit cards but they work a little differently.
With a secured credit card, you have to go through all the hassles of signing up for a credit card, including filling out an application and giving away personal information. The only real difference is that instead of having an unsecured line of credit into which you can tap, you have to “secure” the credit line with cash up front. Pay $500 and you get a $500 limit on your credit card.
Prepaid credit cards work in a similar way but without all the hassles. Actually, they work more like debit cards except they are not tied to a bank account. You “load” the card with your own money and then can use it like a credit or debit card until the money runs out.
Benefits of Prepaid Cards
Two great benefits of prepaid cards are flexibility and saving money.
You can buy a prepaid card in many places. While credit card companies and banks offer prepaid cards, you can also buy the cards in grocery stores, pharmacies and discount stores.
Unlike secured credit cards, which are issued in a certain person’s name, most prepaid cards have no such restriction. You can buy a prepaid card as a gift for someone or give it to one to your kids to use.
Although many prepaid cards do come with a small fee, that fee is usually much smaller than what you might have to pay a credit card company for a secured card. You actually can wind up saving money in the long run by using a prepaid card.
For example, you can only spend the amount that is preloaded on the card, presumably an amount you can afford to spend. That means that there is no debt that can accrue interest every month, so there is no possibility of late fees.
Prepaid cards can’t ruin your credit score the way traditional credit cards can, which means you’ll save money on interest rates that can be put toward your mortgage, auto and other loans.
If you are using a prepaid card in place of a checking account, you don’t have to worry about overdraft fees or maintenance fees charged for not carrying an adequate balance.
Another way you can save money with prepaid cards is by getting certain fees waived. For example, your prepaid card company may have a branded ATM network that allows you to withdraw cash fee-free if you use an approved ATM. Also, some prepaid card companies waive the fee to reload the card if you automatically deposit your paycheck to the card each pay period.