Are Prepaid Credit Cards Any Good?

The Credit CARD Act may push credit cards out of reach for many Americans, especially those under 21. As these consumers look for credit card alternatives, prepaid credit cards will be one of the most attractive options on the menu, but are they worth it?

What is a prepaid credit card?

A prepaid credit card is a credit card that you can preload with money and then use the same way you'd use a credit card. The major difference is that purchases made with a prepaid credit card are deducted directly from the balance that's on the credit card, rather than being added to a revolving balance that must be repaid.

You can get a prepaid credit card regardless of your credit history. Since you're not borrowing money, there's no need for a credit check.

Drawbacks of prepaid cards

You won't encounter late fees or over limit fees, but there are other fees that prepaid cards charge. This includes application fees, annual fees, ATM withdrawal fees, and even transaction fees. You might have to pay a fee to check your balance, request a new card, or even to talk to a customer service representative. These fees are deducted from your card balance and reduce the amount you're able to spend.

A prepaid card won't help you rebuild your credit history. You're not borrowing money and prepaid credit cards don't report to the credit bureaus. Your credit score won't receive any boost from using your prepaid card wisely.

There are not as many government protections with prepaid credit cards. For example, if your prepaid card is lost, stolen, or used fraudulently, the government doesn't require the prepaid card issuer to give back your funds. Your prepaid card issuer may voluntarily offer some protection, but they're not required to do so.

Who will benefit from a prepaid credit card?

Those without credit cards and a checking account or whose checking accounts don't offer a Visa or MasterCard branded check card are more likely to benefit from a prepaid credit card. You can use a prepaid credit card in the same places you'd use a regular credit card or a check card: to make online purchases, to rent a car, or pay for gas at the pump, for example.

Parents might give their teenage children a prepaid credit card to help teach money management. Or, parents might use prepaid cards to safely send money to students who are away at college.

Because of the fees associated with a prepaid card, it's better to sign up for a prepaid card only if you can't get a traditional credit card and your bank doesn't offer a Visa or MasterCard check card. Prepaid cards are unnecessarily expensive, so work on improving your credit score so you can qualify for a regular credit card. Improving your credit score will help out in other areas of your life, like getting a new apartment or lowering your insurance rate.

Photo courtesy of http://www.flickr.com/photos/stuart-dootson/ / CC BY-NC-ND 2.0