Credit card issuers are pushing the concept of prepaid credit cards for those consumers whose credit scores are too low to qualify for a conventional card.
But are they a smart alternative? Only in certain circumstances.
It’s true that a prepaid credit card offers the same convenience as a regular credit card in terms of being able to order on line, reserve a rental car, or pay for your gas at an all-night pump.
But in terms of improving your credit scores, a pre-paid card will do you no good. Since you aren’t borrowing any money to get these cards, their use isn’t reported to the credit bureaus. The only difference between them and the cash in your pocket is convenience.
They even carry the same security level as cash – if you lose the card you’ve lost the money, just as if you lost your cash.
Meanwhile, the cost can be high.
Banks that issue pre-paid credit cards aren’t content with the fees they collect from merchants when you use the card – and since they aren’t collecting any interest from consumers, they add on fees.
You might first pay an application fee, then an activation fee, an annual fee, an ATM withdrawal fee, and perhaps even a transaction fee.
And, since these re-loadable cards branded by MasterCard and Visa are not covered under the consumer protection terms of the CARD Act, card issuers are free to impose short expiration dates and monthly fees for non-use.
From this standpoint, they’re far less safe than cash. You can stuff a wad of cash under the mattress and expect to find the same amount there if you come back a year later. Your pre-paid credit card stuffed under the mattress can lose value each month until it gets to zero – or it can become worthless because it reached an expiration date.
So who should invest in a pre-paid card?
• A prepaid card might be a good choice for a consumer who has no checking account or whose checking account does not offer a Visa or Mastercard check card.
• It can be a convenience for those whose credit scores are too low for a traditional card.
• It is a safer choice for parents who need to send money to a child who is away from home, and can be a useful tool in teaching teens about budgeting and money management.
• Employers can feel more secure when giving an employee a pre-paid card for such things as travel expenses than they might if they gave that employee a regular credit card.
But in general, most consumers are better off working at improving their credit scores so they can qualify for a traditional credit card.
Author: Marte Cliff
CreditScoreQuick.com your resource for credit reports, credit cards, loans and credit news.
