Vision Credit Education, Inc.

We are all familiar with the concept of prepaid cards. While this example isn’t so relevant today, many of us can still remember when prepaid phone cards were useful, especially for traveling. A more relevant example may be buying someone a gift card to their favorite restaurant or shop. The money is paid in advance to be spent later.

Prepaid credit cards have the same goal. However, unlike gift cards, the money loaded onto a prepaid credit card can be spent almost anywhere. In fact, one of the most attractive features of a prepaid credit card is that it will be accepted anywhere a regular credit card is accepted because it’s backed by Visa, MasterCard or one of the other major companies.

Some of you might be thinking that this sounds an awful lot like a debit card. In a sense, it is very much like a debit card. However, debit cards are linked to savings or checking accounts, and the prepaid credit card is only linked to the money you deposit specifically for it. Also, most banks require a minimum balance for savings or checking accounts, and there is no such requirement for prepaid cards.

For example, these cards are especially popular among parents who want to give their children spending allowances. A parent could give their teenager a prepaid credit card that only has a couple hundred dollars deposited on it for clothes or other expenses. This method is safer and more convenient than cash, but still allows for a lot of control by the cardholder or parent, in this example.

These cards are also popular with individuals who have poor credit. They do not qualify for a regular credit card, and a prepaid card is a possible alternative for them. In fact, since no actual line of credit is opened on a prepaid card (you’re spending the money you’ve already deposited), there is no risk of getting into debt. You spend until the money is depleted, and then you can’t spend anymore until you make another deposit.

While prepaid credit cards should not allow you to overdraft (take out more than what you’ve deposited), it never hurts to check with the bank providing the card to make sure. Banks have discovered that overdraft fees are extremely profitable and usually try to use them whenever possible.

So, prepaid credit cards sound pretty great, but there are a few downsides. Usually a bank will charge you a $5-$10 dollar fee to open up the account. Also, possible fees could apply every time you make a deposit. These fees, even though they may seem minimal in isolation, will really add up over time. Essentially, you’d spending a lot of extra money to spend money you already have!

Another downside to these prepaid cards for those with poor credit is that they won’t help you improve your credit score. No payments are being made on a timely basis because it’s essentially a debit card. So, those getting a prepaid credit card hoping it will improve their credit score will be sadly mistaken.

Finally, given the pros and cons, are these prepaid credit cards a good idea? Like the answer to most questions involving credit, debt and finance, it really depends on your situation.

These prepaid cards can be a great budgeting tool for different activities. Having a card reserved strictly for shopping would make sure that only the amount deposited on that card for the month was spent on shopping. Parents may see the benefit of giving their children money in a form that’s convenient and controllable.

However, the fees are a bit worrisome because it seems silly to let someone profit a lot from letting you spend your own money. So, it’s essential to thoroughly investigate any prepaid credit card before getting it. Be aware of all the fees and determine if they are worth the convenience of having the card.