April 17, 2015

How Do Prepaid Credit Cards Work?

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If your credit has suffered because of financial difficulties and you no longer qualify for a regular credit card, or if you are new to the world of credit, you may be wondering whether a prepaid credit card would be helpful to you. It’s important that you clearly understand any type of financial tool before you decide whether or not to use it.

While regular credit cards are a form of loan, prepaid credit cards work more like gift cards. After you register for the prepaid card, you deposit money into the card account ahead of time — just as you would do if you were buying a gift card from a retail store. Once you deposit money into your card account, you can buy items with the card or use it in ATMs until all your deposited money is used up. After that, the card stops working until you put more money into your account. Prepaid credit cards protect you from overspending or from going into debt because you can’t spend more than what you put onto the card. Since the money on a prepaid credit card is not a loan, there is no interest to worry about and no billing cycle or payment schedule.

Here is a good list of the top prepaid credit cards.

Unfortunately, no. The credit reporting agencies don’t pay attention to prepaid credit cards. It might seem as if using a prepaid credit card would be a way to demonstrate that you can handle money responsibly and, thus, help you repair bad credit. Since the card use has no connection to debt, however, it’s like paying for your purchases with cash. Credit agencies are only interested in your debts and obligations; they don’t care about what you do with your cash.

If you are looking for credit cards that can help you boost your credit score, here are some of the best.

Yes. Prepaid credit cards can be surprisingly expensive. There is an initial setup fee, and another fee every time you load money onto the card. Other fees sometimes apply when you withdraw money from an ATM, and sometimes even when you check your balance. Most prepaid cards charge monthly fees whether you have used them that month or not. Since fees will automatically be subtracted from your balance, you might put the card in a drawer for a while and then discover that all the funds have been used up by monthly fees.

The people who truly benefit from prepaid cards are those who don’t have bank accounts. If you have a checking account with a debit card, you probably don’t need a prepaid credit card. However, if you’re someone who (for whatever reason) does not have a bank account, prepaid cards offer important conveniences. You can use them to pay bills and make purchases online or just as a safe way to store cash until you need it. Furthermore, your funds are protected by Visa or MasterCard in case of theft or fraud, so you can get your money back if the card is stolen. Prepaid cards are also a useful way for parents to give shopping money to their teens since the young person can’t overspend.

As you can see, prepaid cards are sometimes the right choice. If you feel that a prepaid credit card would be useful to you, be sure to shop around carefully to find the card with the lowest costs.

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