The Advantages and Disadvantages of Prepaid Credit Cards Prepaid credit cards are a useful tool if you know how to use them. Their main purpose is to help you get your credit card use under control. Credit card debt is easy to obtain as you forget about paying it off in full each month and the interest rate rises. There are definite advantages and disadvantages to using pre paid credit cards. Advantages: The first advantage of having a prepaid credit card is no interest rate. The prepaid card means that you an opening an account and placing money to use as a debit on the account. Therefore you can’t use the card unless there is actually money in the account. It also means there is no balance to charge you interest for. Since it is used like a debit card you don’t have to worry about over spending. If the money isn’t in the account, you can’t use the card for a purchase. Prepaid credit cards report to the credit bureaus. This means that each time you use the card or reload the card you are going to establish information to send to the credit reporting agencies. Since you can’t overuse the account the reports will be good. The reports will then increase your credit scores and strengthen your history. An improvement in scores means that other credit lines will be available down the road such as a mortgage. Pre paid credit cards are taken like credit cards which means any place that accepts credit will accept your prepaid card. Convenience of the cards is another aspect. Credit cards cannot be given to anyone under the age of 18. However, this is not the case with prepaid cards. As long as the parent co-signs the card or wants an additional card in their teenagers name a card can be offered. This convenience allows your children to go to the store for you when you can’t make it or get food without having to ask for cash. Disadvantages: Convenience is also a disadvantage when considering who uses the card. Children or teenagers are not always aware of the consequences of using credit. They may overuse the card and expect it to have a balance no matter what they buy. This is where rules come into play so that it is available when needed. The biggest disadvantage to prepaid cards is the fees. It is true that there are no interest rates charged, but there are three or four fees. The first fee is a start up fee that must be given in order to open an account. The second fee is the transaction fee. This requires 1 percent of the purchase in most cases, but can vary from company to company. The third fee is the reload fee. This fee is around 4.99 pounds each time you reload the account. There can be a fourth fee such as a yearly accounting fee, but most times good research will have you avoiding these. The start up fee may also be waived by a credit card company as an introduction, so look for this option. Another disadvantage is the balance you can keep on the card. Normally this is what you set it at, but that also means you can’t do larger purchases with the card without planning. In other words don’t take the transaction fee associated with a large purchase; just buy it outright. There are many reasons to have prepaid credit cards as you saw above. They do have their purpose in control and helping re-establish credit; therefore it is up to your needs to decide what will really work for you. |
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