Readers: This is article 22 of 25 from my no-nonsense “Credit Card Basics” quick-reference series.
A prepaid card offers an easy way for people who want to buy things using plastic — but without the need for a bank account or credit card. In fact, they’re used exactly like a normal credit card, but they rely on funds that are preloaded by you, rather than funds provided by a credit card company.
Prepaid cardholders choose how much cash to put on the card; those funds are then deducted with every purchase made with it, and more funds can be added to the card’s balance as it approaches zero.
Since pre-paid cards don’t charge interest, the issuers make money by charging fees — unfortunately, there are usually a lot of them. Typical fees may include set-up and maintenance fees, ATM withdrawal fees, and even fees for adding cash to your card balance.
You should consider getting a pre-paid card if:
You’ve been unable to qualify for a regular credit card
- You have a hard time managing your finances
- You’re looking for a viable alternative to bank accounts and credit cards
On the other hand, you should avoid getting a pre-paid card if:
- You’re looking to establish or improve your credit, since prepaid card activity isn’t tracked by credit agencies
- You plan on using the card only for emergencies (because the monthly maintenance fees will eventually eat all of your funds)
Photo Credit: GotCredit