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Prepaid credit cards

Posted by Mr. Hachis | On: Oct 03 2010

Prepaid credit cards offer shopping convenience and teach financial responsibility!

You've probably heard the term 'prepaid credit cards', which is somewhat of a confusing moniker. Bankers devised this credit marketing vehicle to serve people with poor credit, who were unable to obtain a true line of credit, but needed the convenience of funds on a piece of plastic, to pay for items without carrying a large amount of cash, or making out a check when far from home – many retailers won't accept checks from out-of-towners. With prepaid credit cards, you deposit the funds with the bank up front. You then receive a card which you can use to buy goods up to the prepaid amount. When the funds available on the card are running low, you simply deposit more funds in order to continue this convenient way of shopping.

You may wonder how the bank makes money on this type of card. With a true credit card, the bank charges interest on the outstanding balance, in most cases compounded daily. With prepaid credit cards, the bank is holding your money, at least until you spend it. The money you've deposited allows them to earn interest by loaning it out to other customers, or simply accruing it in a holding company sort of fund. So, they're making money and you get the convenience.

However, there's another purpose for which these cards may be used. If you've got teenagers in your household, or are a teen, this can be an excellent way to teach, or learn, fiscal responsibility. After all, there's no option for 'over-the-limit' spending, which, with a regular credit card, comes with penalties and a higher APR. You're limited to the amount you've deposited. You need to be careful that you keep close tabs on the amount you have left on prepaid credit cards. If you try to 'charge' more than the available funds, the transaction will be declined. Not only that, but the lending institution will make note of this cavalier use of the card, earning you a black mark on your credit report. If you have no credit when you begin using the prepaid card, this irresponsibility won't help you build a credit rating. If you have poor credit already, this activity only makes your credit rating worse.

When you consider that the majority of new high school graduates cannot balance a checkbook, using the prepaid card becomes a teaching aid. When using your card, be sure to record each transaction as it's made, so that you know exactly what you've got left to spend. Once you develop this habit, you're far more likely to continue the practice, both in a checking account and with credit cards. It's a simple matter of addition and subtraction. You don't have to be an accountant to master the bottom line of your own money!

Now, you're equipped to purchase prepaid credit cards and use them responsibly. Go for it!

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