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PrePaid and Debit Cards Can Rebuild Credit

Written by: Kristy Welsh

Last Updated: July 27, 2017

Have you recently been rejected after filling out a credit card application because of poor credit? You are not alone. The problem is, a major credit card is often needed to make a hotel or airline reservation or placing an order online. For those with bad credit, not having a credit card to use for these types of transactions can make life difficult, if not down right depressing.

What is a Prepaid Credit Card?

A prepaid credit card is a card issued by a financial institution that is preloaded with funds and is used much like a normal credit card.  A prepaid card work in the opposite way of a normal credit card, because instead of buying something with borrowed funds (through credit), you buy things with funds that have been already been paid.  With a prepaid card, the credit limit is determined by the amount of money you deposited into an open checking or savings account. Once you fund the account with a designated amount, you are issued a prepaid credit card that can be used anywhere one would use a regular credit card.

The best part about a prepaid credit card is that one can not spend more than the amount of the deposit and there are no interest charges or late fees since the money is already there to use if you do not pay your monthly bill on time.

What is a Debit Card?

A debit card is not like a prepaid credit card. A debit card immediately deducts funds from your account associated with the card.

Why Are These Called Credit Cards?

The reason why the word "credit" is associated with these prepaid cards is because most cards carry a credit card brand (such as Visa or MasterCard) and can be used in similar ways. It's really no more than a stored value card that can be used in multiple locations due to the Visa (or other credit card) insignia. As more consumers require a suitable solution to rebuilding credit, recent changes have allowed some credit card companies to offer pre-paid credit cards to help rebuild credit. However, they are harder to find, and many have higher fees associated with them; so make sure you do your research. Many pre-paid products falsely claim they will improve your credit rating.

Benefits of a Prepaid Credit Card

  • There is no such thing as over-drafting your account; you cannot exceed your limit.
  • Prepaid credit cards can be a big advantage to low-income consumers who might otherwise be stuck dealing in cash, unable to make such basic transactions as paying for gas at the pump, paying bills online, or making car rental or hotel reservations.
  • Contingent on the card you select, your money may be protected if your card is ever lost or stolen.
  • A pre-loaded credit card is a convenient way to pay for goods when traveling, even outside the U.S.
  • Prepaid credit are often marketed to teenagers for shopping online without having their parents complete the transaction, or as a convenience for parents wishing to provide funds to children away from home.
  • Obtaining a prepaid credit card is easy, fast, and requires no credit check.
  • Some prepaid credit cards today report card history to major credit bureaus, so cardholders may be able to build or rebuild their credit using a prepaid credit card without the risk of damaging it along the way.

Prepaid credit cards are a good solution for anyone who does not want to be tied down to a banking institution, anyone wanting a more secure way to carry their money than simply cash, or anyone having troubles being approved for a credit card. In today's society that is more and more cashless, somebody who doesn't have access to cashless transaction vehicles is at a major disadvantage.

Disadvantages to Prepaid Credit Cards

There are a number downsides to the prepaid card. Most cards require a start-up fee, and while for many companies this fee is minimal, some of them are substantial. In addition, you'll most likely have to pay additional fees each time you deposit more cash into your prepaid credit card account; perhaps not as much as the initial fee, but a fee, no less. Some cards will allow you to add more funds for free, but may charge a monthly "maintenance" fee instead. Another downside is that many businesses that accept automatic payments from bank or credit card accounts may not accept them from prepaid cards. For most consumers this is a minimal annoyance, but for some it can be a significant setback.

As with any credit product, when selecting a prepaid card you should always do your research and make an informed decision on the best card to meet your individual needs. As stated previously, there may be a number of different fees associated with using a prepaid credit card, some of which might be high enough to offset any benefits. A prepaid credit card will generally carry more fees than a secured or unsecured credit card (presuming you pay them off monthly) therefore a prepaid card may only be a good option for those who cannot obtain any other form of credit, but require the convenience of a credit card.

What to Look For When Choosing a Prepaid Credit Card

There are a lot of products out there and the only way to get the best card for you, is to ask some questions and read all the fine print before choosing a prepaid card. Below are some recommended things to looks for and ask about when picking out a card to suit your lifestyle.

Sign-up or Start-up Fee:  Self-explanatory. May range from free to $50.

Transaction, POS, or Usage fee:  A fee assessed each time you use the card at a store, online, by phone, etc. Typically it is "no charge", but there might be a small fee, under a dollar.

ATM Withdrawal fee:  Can range from free to $5 or more. May be higher for International withdrawals.

Monthly Maintenance Fee:  A fee charged to your account each month. Sometimes there is no fee for the first few months, and then one kicks in after 6 months; can range from free to $10 or less.

Reloading or Recharging Fee:  A fee charged to you for adding more money to the account where your money is being held. Depending on the method used to add or transfer the money (at a retail location, using another credit card, cash, etc) the fee may differ. Typically free to less than $5.

Balance Inquiry Fee:  A fee to provide you information about your available balance. Can vary contingent on the method you use to request the information: online, telephone, ATM. May range from "free" to $3.00 or less.

Monthly Statement Fee: A fee for obtaining monthly transaction history. May be up to $10 if sent by mail, however is typically free of charge if you go to the card issuer's website.

Cancellation/Refund Fees:  A potential fee for canceling your card altogether or requesting a partial refund of monies loaded onto the card.

Insufficient Funds/Overdraft Fees:  A fee charged if you attempt to make a transaction and it is refused to to inadequate funds in your account; or, it goes through anyway but you exceed your limit. Usually under 3 dollars.

Foreign Currency Conversion Fee:  A fee, usually a percentage of the total amount spent, charged to convert from another currency during international transactions/travel.

In Summary:  Check out the various types of prepaid credit cards on the market. Read the terms and conditions carefully, and define your objectives for needing this product. Depending on your individual needs, you may find that a traditional credit card, a secured credit card or a debit card will work better for you and save you money in the long run.