By Mory Brenner, Esq.
Prepaid Credit Cards For People With Bad Credit
Prepaid credit cards?! An oxymoron, a contradiction in terms, in short, something just sounds wrong about a prepaid credit card. Yet, some people may find prepaid credit cards suit them perfectly. Let's explore what prepaid credit cards are and who might want one.
Begin by understanding the concept of a prepaid credit card. In my mind, we need to look at both the name of this product and what it offers a consumer. I find no "credit" involved in a prepaid credit card. For those of you who like to call facial tissue "Kleenex" or my mother-in-law who still calls the refrigerator a "Frigidaire" or even those who call a pick up truck a car, calling this a credit card might seem just fine, but rest assured, credit plays no part in this show. People think of standard credit cards, how they look, how they function for daily purchases and they want that convenience. By offering many of the benefits of a regular credit card and calling it a credit card the marketers of prepaid credit cards fool people into thinking it is a credit card. For some it may not even matter, but for our discussion today we must learn first of all that a prepaid credit card is not really a credit card at all, as credit never comes into the process. For most prepaid credit cards that means no reporting to the credit bureaus either, making a prepaid credit card a bad choice if you are attempting to improve your credit score.
To get a more accurate concept of how a prepaid credit card operates, I would think of it more like a gift card than a credit card. You may use the prepaid credit card any where the card system, like Visa, MasterCard or American Express, is accepted. Your spending limit gets determined by how much you load the card with and no one really knows what type of card it represents in terms of prepaid, unsecured, secured or debit. In fact, when you buy things with it you almost always define it as a credit card not a debit card when prompted and you need not enter a pin code.
A prepaid credit card operates differently than a gift card in a few ways. You may not reload a gift card, while credit card companies encourage you to refill prepaid credit cards. On most gift cards the user incurs no monthly fee, while with most prepaid credit cards the issuer reduces the card balance by a little monthly access charge. While small, these charges can add up if you keep the prepaid credit card for many months or years.
On first glance you might think that an educated consumer always lands in a better place using a debit card or a secured credit card, but let's examine instances where a prepaid credit card emerges as the best option. A downside of a debit card reveals itself when the debit card ends up in criminal hands. Even when the consumer protections limit the liability of the debit card holder to zero, the process of the bank putting the stolen money back into your account might take 30-90 days. To have no access to that money, which might represent all of your money, can certainly cause a hardship. Aside from a crook gaining access to all of the money in your checking account through a debit card some people fight themselves as the worst enemy leading them to financial trouble. A debit card allows anyone with access to ability to spend every penny in the associated checking account, including the owner. A debit card allows people to spend money they might need for a mortgage on frivolities or even to spend money on things they need like clothing, only to discover they did so without regard to an overall budget and face bigger trouble like foreclosure because of it. Using a prepaid credit card instead of a debit card works as a budget enforcer, you may spend the limit on the card and no more.
Some people use prepaid credit cards like gift cards in that they use the cards as a means of transferring money to others. Think about a father who wants to give his daughter living across the country an allowance of $500 per month. By using a prepaid credit card he gains the ability to grant her access to a specific limited level of funds. If she goes over her purchase gets denied. If they had a similar arrangement with a debit card the bank and merchant might let the transaction through and charge the account overdraft fees, not to mention they would expect the money owed to come in as an additional deposit.
If you indeed want a prepaid credit card and need to select one look at and compare fees like these: monthly fees, initial start up fees, fees for additional deposits, foreign transaction fees, lost card fees, cash advance or ATM fees, secondary card fees, PIN transaction fees, balance inquiry fees, customer service fees, paper statement fees, ACH fees, live teller fees and blowing your nose fees ( ok, I made that last one up ). Other items that you must read about and compare include the merchant system ( such as Visa, MasterCard, American Express or Discover ), lost or stolen card rules, the ability to reload the card, if they report to credit agencies, minimum and maximum deposits and allowable card balances, ability to pay bills online or make ACH transfers, ability to make direct deposits to the prepaid card and how pretty a picture they display on the front of the card, although that should count far less than any of the other items.
Finding prepaid credit cards poses no challenge and gets easier every day. Look for prepaid credit cards online, in local department stores or convenience stores or from a local bank. As long as you know all of the pros and cons about prepaid credit cards, if you feel they meet your needs better than the other options, and you use them in a smart way, you should find they provide the services they promised and hopefully meet your goals for a card.