A Guide to Prepaid Credit Cards

Can Paying in Advance Help People with Bad Credit?

Sep 7, 2009 Carol Finch

Prepaid credit cards have various advantages, especially for people with bad credit. How do these cards work, how are they useful and what are the pros and cons?

Prepaid credit cards seem to be growing in popularity. They do not work like a standard credit card as the user doesn't borrow money to make a purchase that they then pay back later. These products are loaded with cash before any purchases can be made. They can then be used until their credit runs out. If the user wants to continue using them then they need to add more cash to their account.

This can be a useful way of accessing a credit card in certain situations. A prepaid credit card also can't get an individual into debt because they can only spend what is loaded on to their card. But, this kind of product can be used in the same way as a credit card whether shopping online on on the high street.

Who Can Benefit From Using Prepaid Credit Cards?

These products are used by different people in different circumstances and situations. So, for example, they could be useful for:

People that have a bad credit history and that find it hard to get approval for standard credit cards.
Parents that wish to give teenagers/students a cash cushion for emergencies but that don't wish to put them on their own cards as additional cardholders.
People that are looking for added security when shopping online. These cards cannot be used to spend more than is loaded on to them.
Holidaymakers that want to use a credit card when abroad but that want to avoid taking cards with them or potentially falling foul of credit card fraud.
People that want to avoid using standard credit cards but that need access to a card solution when shopping.

In these cases using this kind of card can be useful. It can minimise risk and give an alternative solution to standard credit cards.

The Pros and Cons of Using Prepaid Credit Cards

There obviously are some advantages to using these financial products. In brief, they:

Give an alternative to credit cards for those with bad credit ratings.
Can help avoid getting into credit card debt.
May be used for emergency cash funding.
Can help avoid credit card fraud.

Before choosing to take out a prepaid card, however, consumers should look at the deal that they are getting. Card providers will not be making money on interest charges here so most cards will have some other costs associated with them. These can include:

A charge to set up the account in the first place.
A monthly/annual fee to keep the account open.
A charge to load money on to the card.
A charge for any spending made on the card (this can vary according to how/where the card is used).

Not all prepaid credit cards will levy all of these charges but some will. It makes sense, if this is a solution of interest, to compare the actual costs of using this kind of card from different providers before choosing one. Those looking for help building or repairing their credit record may also want to consider using a prepaid card with a credit building element built in. If card spending will solely be made online then a virtual prepaid card may also be worth a look.

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