Credit Cards: What Is A Prepaid Credit Card?

There is an alternative to traditional credit cards, a prepaid card may be meet your needs.

Credit cards are practically a necessity. It's almost impossible to rent a car, reserve a hotel room, or make a large purchase without a credit card. Many businesses now require customers to have a credit card on file - even if paying with cash or check. What can you do if you have bad credit or no credit?

A prepaid credit card may be the solution.

Prepaid credit cards are also known as "pay as you go" cards. They work much like traditional credit cards. The difference is that prepaid credit cards don't involve borrowing money from the issuer. You preload the card with money and then use it wherever Visa or Mastercard are accepted. Late fees and interest charges are not applicable. Simply refill the card when the balance is low or depleted.

Don't confuse prepaid credit cards with debit cards. They are similar, but debit cards are limiting. Some businesses don't accept them, and banks don't report debit card activity to credit rating bureaus. Using a debit card won't help improve your credit score or prove your credit worthiness.

Prepaid cards are relatively easy to obtain. They can be purchased online and in some retail stores. There are no income requirements or imposed limits. The limit is however much you load onto the card. You will be better able to monitor your spending habits, and avoid making impulse buys.

Does a prepaid card meet your needs? A prepaid card is good if:

1. You have no credit cards. You may fear getting into financial trouble. Maybe you feel credit cards are risky. The intrusiveness of supplying your private information may also be a deterrent. Prepaid credit cards eliminate these worries.

There is no chance of debt because you're not borrowing anything. You don't have to provide a lot of sensitive information, but a checking account is necessary to fund the card. If that makes you uncomfortable consider opening an account specifically to fund the card.

It's impossible to tell a traditional credit card from a prepaid credit card. Your card will be accepted wherever Visa or Mastercard are accepted.

2. You're a parent with teenagers. A prepaid card can provide teens the convenience of a credit card. But it will also help them learn financial responsibility. Credit card companies target recent graduates and college freshmen. Make sure your teens are prepared to handle the responsibility of a "real" credit card.

Prepaid credit cards eliminate splurging and overspending. Your teen's spending will be limited by the amount you preload onto the card. Each buying decision will have to be considered carefully and not done on a whim.

3. You have bad credit. Some prepaid card issuers report activity to the three major

credit rating bureaus (Experian, Equifax, and TransUnion). A prepaid card of this sort will help you improve your credit history and rating.

It will increase your chances of getting a loan, mortgage, or traditional credit card. You'll also learn to use credit wisely so you won't find yourself in more financial trouble.

The catch is that there are fees involved. There is normally an application fee. Application fees can range from $20 to $60. An annual fee may also apply. Some issuers even charge a fee each and every time you refill the card. All the necessary information should be clearly outlined in the application.

So there you have it. If you decide a prepaid card is for you, check several issuers before making your final decision. Pick the card that's best for your situation.

© High Speed Ventures 2011