The Pros and Cons of Using Prepaid Credit Cards

Credit Cards

Prepaid credit cards can be a great way to pay off debt, but there are some things you should know before you do so. Here are a few key points to consider.

What is a prepaid credit card?

A prepaid credit card, also known as a “secured credit card,” is a plastic card that can be used as a regular credit card, but the money is put on the card or pre-loaded before it’s used. Many people find prepaid cards useful when they don’t have access to a normal credit card or don’t want to carry a lot of cash around.

Prepaid credit card are also helpful for those who need to build their credit scores after previously going through collections or declaring bankruptcy. However, they’re not great for those still in debt since they require you to secure your limit with personal funds. If this is the case, then consider using debt consolidation strategies before applying for any other cards so you can clear your outstanding debt and repair your credit without another card.

How does a prepaid credit card work?

When you first get a prepaid credit card, you will need to put money on it. For example, if you want to have a $300 credit limit, you’ll need to deposit $300 onto the card. This money can be transferred to the card from a bank account, a debit card, or a credit card. You can use the prepaid card like a regular credit card, but you will need to pay the balance in full each month and get back to that original, secured amount.

Pros of prepaid credit cards

  1. You can’t overspend: One of the biggest benefits of using a prepaid credit card is that you can’t overspend since your limit is only as high as the amount you’ve deposited. This can be helpful if you are trying to pay off debt because it prevents you from racking up more debt.
  2. They can help you build credit: Another benefit of using a prepaid credit card is to help you build your credit score. This is because prepaid credit cards are reported to the credit bureaus, which can help you establish a good credit history.
  3. They come with budgeting tools: Many prepaid credit cards come with budgeting tools, such as alerts that tell you when your spending is getting high. This can help you stay on track and avoid overspending.
  4. You can use them anywhere: One of the best things about prepaid credit cards is that you can use them anywhere. This means that you can use them for small expenses, such as groceries or gas, or larger expenses, such as a plane ticket or a rental car.

Cons of prepaid credit cards

  1. They can have a high annual fee: Before signing up for a prepaid credit card, check what the annual fee is as secured cards typically come with high annual fees. If you’re struggling to make ends meet, adding another cost to your budget could be challenging.
  2. They can have hidden fees: Another downside of prepaid credit cards is that they can have hidden fees, such as transaction fees, service fees, and overdraft fees. Before signing up for a prepaid card, read the fine print to understand when you might be charged a fee.
  3. They often have restrictions: Some prepaid credit cards have restrictions, such as requiring you to use them only for certain types of expenses or for a certain period of time, which makes them less versatile than regular credit cards.

 The bottom line

Overall, prepaid credit cards are a good option for people who need to repair their credit scores or those who aren’t comfortable carrying cash. However, they can come with fees and restrictions.

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