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In the world of personal finance, there is seemingly no end to the various products, both credit and money related we can sign up for, then use at our leisure. However, our spending habits can easily get out of control, especially when it comes to credit cards. Being that credit cards are a form of revolving debt, where the credit limit resets every month, it can be tempting to simply pay the minimum monthly fees, all the while building up a hefty balance that we might not be able to afford down the line. Even some rewards cards, which can have a yearly fee over $100, are free to try for the first 12 months following the card’s activation. Another gimmick that can land a consumer in debt if they haven’t thought the decision through properly.
That’s where prepaid credit cards tend to make their appearance, or at least that’s just one of the reasons some consumers choose to purchase them over traditional credit cards. In fact, there are several rationalities that make prepaid credit cards both a justifiable and not-so-justifiable choice, and we’ll explain some of them in the article below.
Before weighing the benefits and drawbacks of using prepaid credit cards, we must first learn what they are. Unlike a traditional credit card, which will have a monthly credit limit, a prepaid credit card has a total cash limit. Instead of that limit resetting itself at the beginning of every month, a prepaid credit card already has a specific amount of money on it. If you should spend any of that money, the limit will drop in accordance with how much you’ve spent. The limit that a prepaid card can hold is typically dependant on the policies of the company that issues it, but it can range anywhere from a few hundred dollars, all the way up to $15,000 in some cases.
Prepaid cards are usually purchased through the same companies that deal in normal credit cards, such as MasterCard or Visa, although you can sometimes get them as promotional products through partnering companies and retailers. However, since they don’t actually involve credit, they’re really only called “credit cards” because they’re mostly sold by credit card companies.
For 10 more questions to ask about prepaid credit cards, click here.
Anyone who wants a prepaid credit card need only purchase one through the credit card company of their choice, which you can do at your bank, on the internet, or over the phone. Where prepaid cards differ from regular credit cards is that they usually require no credit check or application. You simply need to be 18 years of age or older, unless your parents give their bank permission to open you an account, which is common. Parents will often open a prepaid account for their children as a gift, or to introduce them to the idea of using credit, all while keeping their spending under control.
A prepaid card functions much like a gift card that you would purchase from any retailer, but that you can use in multiple types of locations. You pay a small fee for the card itself, then you can fill it up as needed, to whatever limit you would like it set to. Prepaid cards resemble that of a typical chequing account, more than they do an actual credit card. If you decide to put $500 on the card, then buy something that costs $200, you’ll have $300 remaining until you decide to fill the card up again. Like a regular credit card, you can pay for things using an electronic terminal at retailers, restaurants, gas stations, or anywhere else prepaid cards are accepted. You can also use it for purchasing things online and over the phone.
Prepaid credits don’t affect your credit score. Watch the video above to find out what does.
Even though prepaid credit cards are mostly sold by companies that are better known for their regular credit cards, the two types of cards are actually different in many ways. While at first glance, prepaid cards might look exactly the same, they way they function is altogether different.
For instance:
Check out our other article for more information on Consumer Debt.
Secured credit cards are actually more similar to prepaid cards than regular credit cards are. For instance, both secured credit and prepaid cards are often advertised to those with poor credit. Both types of cards also require you to put money on them upfront. With a prepaid card, you must pay for the card itself, then put money on it before you can use it. Secured credit cards require a deposit before they’re activated.
Then again, secured credit cards are also different in certain ways:
Read this for more information on the differences between prepaid cards and secured cards.
Prepaid credit cards come with many qualities that make them attractive to some consumers. For example:
While they have many noteworthy qualities, prepaid credit cards, like any type of financial product, do come with their disadvantages, such as:
As we mentioned earlier, there are a few kinds of consumers that can benefit more from the use of a prepaid credit card than they would a regular or secured credit card. Since they aren’t really considered credit cards (just debit-style cards issued by credit card companies) consumers with poor credit are one of the key groups that they’re advertised towards. So, if you happen to have a low credit score and are having trouble getting approved for a normal credit card, prepaid cards might be the right choice for you.
Prepaid cards can also be a good gift for a family member or loved one. The receiver can spend the money on whatever they want and any extra fees will be taken out of the card’s holdings. Once the card is empty, they can simply have it deactivated, then throw it away, or refill it themselves. They are also common among students, who need to pay for books and other supplies, all while sticking to a set limit.
However, if you’re looking to build or improve your credit, a prepaid credit card is not the best choice. In this case, if you already have favorable credit, a regular credit card will benefit you more. If you have poor credit, using a secured credit card until you can have it converted to an unsecured one will likely be the best option.
If you’re thinking about buying a prepaid card instead of a typical credit card, just make sure you’re being cautious about it and taking all factors into consideration beforehand. Do some research before making any decisions, this will help you make sure that both the card company and the card itself are legitimate.
For some important information on prepaid credit card scams, click here.
If and when you’ve found a prepaid credit card that you think is a good fit for your financial situation, make sure you know everything about the product that you’re about to buy. Tedious as it may be, just like you should with any financial product, carefully read the fine print in the cardholder clause, this way you’ll be completely informed about any fees and rules that come with the card. If you’re happy with the prepaid card, you can continue to spend wisely until you’re ready for the responsibility of a regular credit card.
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