For all their benefits and drawbacks, credit cards are a part of our culture. Nearly everyone has at least one card, and recent studies show the average American household to have over $5,000 in credit card debt.
Recently, pre-paid credit cards have become more popular. What is a pre-paid credit card?
A pre-paid credit card acts the same as a traditional credit card for the in-store transaction, but the balance is pre-loaded onto the specific card. The function is similar to that of a debit card -- when the card is used for a purchase, the purchase price is subtracted from the account balance. A pre-paid credit card differs from debit cards in that it is not linked to a particular bank account, such as your checking or saving account. They also differ in that pre-paid credit cards often come with reward points and programs that are not available on your debit card. Both types of cards offer similar protection through your bank if the card is lost or stolen. With a pre-paid credit card, however, the thief will not have access to your entire checking account, only the remaining balance on the pre-paid card.
So what are some of the benefits?
- Pre-paid cards allow customers with bad credit or no credit to get a card. If you have a poor credit history or no credit history, you may be turned down for a credit card or offered a card with a very high interest rate. Anyone can qualify for a pre-paid credit card, regardless of credit history.
Give one to your teenager. Many parents would like to give their teenagers a credit card for emergencies or purchases, but the idea of a card with available credit is scary. A pre-paid credit card allows the parents to monitor what is being spent by their teenager.
You can add to the balance at any time. Most cards allow you to make online or over-the-phone transfers to the balance of the card. If you are going on a trip or simply want to set up a monthly budgeted amount to transfer to the pre-paid card, you can do so.
Avoid some common credit card mistakes. With a pre-paid card, you can never spend more than you can afford. You will not have late payments which can damage your credit rating.
Cards allow you to earn reward points. Some companies offer pre-paid credit cards will allow you to earn airline miles, entertainment points or other redeemable benefits for use; just like their higher risk traditional credit cards.
They are easy to apply for online. Websites like Creditcards.com will allow you to apply for the card online.
What are the drawbacks of a pre-paid credit card?
- Annual and no-transaction fees. Some pre-paid cards will have an annual fee, ranging from $10 to $60. They may also have an inactivity fee if you go for a period of time carrying a balance, but not using the card. Be sure to read the fine print of the card when you are applying.
Not really a credit card. A pre-paid card is not a credit card in the sense that you are able to access a line of credit above and beyond your balance. If you run into an emergency that will require you to spend more than you actually have on the card, you will not be able to do so with a pre-paid credit card.
Reviewing the above pros and cons of a pre-paid credit card should give you enough information to make an informed decision about whether a pre-paid credit card is right for you.