Posts tagged: prepaid_credit_cards

Secured and Prepaid Credit Cards

Over the last month or so I’ve done a whole series of posts about secured credit cards. We’ve looked at their requirements for approval, their fees, their interest rates, and the benefits they have for people trying to rebuild their credit. You can sum up our conversations about secured credit cards this way: they will help you rebuild your credit score or establish credit history, but it’s going to cost you in the form of security deposits, relatively high interest rates, and fees.

To wrap up the series I wanted to use at least one post to discuss prepaid credit cards. Secured and prepaid credit cards have some things in common, but they also have some big differences.

What is a Prepaid Credit Card?

A prepaid credit card is basically a charge card. What does that mean? It means you open an account with a card provider and you deposit a certain amount of money into that account. The card provider gives a card with a credit card logo on it that acts just like a credit card. You can use it to buy things online, in stores – pretty much wherever credit cards are accepted.

But here’s the big difference between a normal or secured credit card and a prepaid credit card. When you use a prepaid credit card you’re actually using your own money. That’s different than a secured credit card because secured credit cards are actual credit cards with interest rates; they’re just secured by a cash deposit you made when you opened the account.

There are a few misconceptions about prepaid credit cards. One is that they help establish or rebuild credit. It’s not true. Prepaid credit cards don’t help your status with the credit bureaus because the card providers don’t have anything meaningful to tell them. Think about it – what would they say? “He successfully spend his own money until it ran out.”

I guess if you look hard enough you may find a prepaid card that reports to the credit bureaus, but it will be tough to find one.

The other downside I see in prepaid credit cards is they have fees. They’ll ususally charge between $5 and $10 to open the account and then there may be ongoing fees just to keep the account open.

What’s the Upside?

I’m actually not sure there is much of an upside. The only time I can think of that you’d be wise to open a prepaid credit card would be if you can’t get a checking account with a debit card. In that case it may be worth it to open one.

Wait – there may be one more circumstance where you might want to have a prepaid credit card. If you’re a person that has some fear about online shopping with one of your own credit cards or your debit card, a prepaid card gives you a credit card number to use on ecommerce and other shopping sites without having to worry about someone stealing your card and charging big purchases to it.

Secured Credit Cards are the Way to Go

I’d recommend that instead of opening a prepaid credit card, get a secured one instead. Your cash out of pocket will be basically equal, but the secured credit card will help you on your way to improving your credit score.

Low Limit High School Student Credit Cards

To be honest the idea of high school kids running around with credit cards should probably make us all a little nervous. Teenagers aren’t known for their foresight or restraint are they? No, they’re not. They’re known for seeking excess. I’m not saying it’s such bad thing. Teens need to spread their wings a little, rebel a little.

So when we think about the right way to ease kids into the world of credit cards, we want to make sure they have that sense of freedom without giving them the chance to get a headstart down the road to financial ruin.

When I got my first credit card I was 18. I was financially clueless. I was clueless in everything else too. But especially financially. A good friend and mentor advised me to get a credit card so I could establish credit history and get a decent credit score while I was still young. He also advised me to keep the limit low. This was his advice:

“Get a low limit credit card. Everyone screws up and maxes out their credit cards at least once in their life. You’re better off doing it with a $500 credit limit than with a $5000 credit limit.”

He couldn’t have been more right. Sure enough, I maxed that credit card out soon after I got it. Luckily it was only $500 worth, and I only had to see one finance charge on my statement to realize I didn’t want to misuse credit cards ever again. I’ve made my mistakes since then, but I’ve never forgotten the lesson learned from my first credit card.

For parents who want to give their teen an even safer credit learning tool, there are prepaid credit cards. In a sense, it’s not a credit card at all. It’s a charge card. What that means is you load it up with whatever amount of money you’re okay with your teen losing, and then let them experience making purchases with the plastic.

If nothing else, using a prepaid credit card should teach kids that credit cards are ‘real money’. In other words, you may not take the cash out of your wallet and hand it to the cashier, but it’s money you’re responsible for. When you run out of money on the prepaid card, the card is useless. That’s a great thing for a kid to get used to. It should help them understand that credit cards are a tool to be used intelligently.