What Are Prepaid Credit Cards?

You hear their benefits discussed in many media publications these days, but what are prepaid credit cards? This article aims to clear up confusion about what a prepaid card is all about and how it actually works.

Prepaid credit cards can be a particularly good way to get your credit record back on the right track if you have a poor credit history.

What Are Prepaid Credit Cards?

The name should give you some idea of how these cards work. Rather than borrowing money from the credit card company and paying it back at an agreed upon time, you instead put money in an account linked to the card before you spend it. In some ways this is similar to a regular debit card where you’d deposit money into an account to which the credit card is linked so when you make a purchase you are actually spending your own money from that account.

The Benefits of a Prepaid Credit Card

So why, then, would you use a prepaid credit card instead of a regular debit card linked up to your bank account? There are a few benefits to using the credit card:

• Most online merchants require the use of a credit card and will not take a debit card for purchases.
• You can use the card to book hotel rooms or car rentals.
• You can get a prepaid credit card easily with bad credit and use it to help you rebuild your credit score.

One other obvious advantage of a prepaid credit card is that you can’t slip into debt by using it. Once the money in the account linked to the card runs out—that’s it—you can’t spend any more money until you make another deposit. This is handy for people who have a tendency to overspend when using a credit card.

Internet Shopping

Most Internet businesses will only accept transactions via credit card or Paypal. If you don’t have a credit card, it severely limits your ability to buy online. This can mean your overall expenditures end up at a higher level since many goods and services can be found for lower prices on the Internet than in a brick and mortar store.

Bookings

Many hotels and car rental companies will not accept bookings unless you have a credit card. There are many other services which are much easier to use when you have access to a credit card. For instance, you can save significant amounts of money when travelling by booking flights online through price comparison websites or directly with on an airline site.

Rebuilding Your Credit

The most important benefit of the prepaid credit card is its potential for use in rebuilding a bad credit record. Most credit card institutions will only give cards to someone with bad credit when the card carries a very high interest rate. Signing up for one of these cards often only leads the consumer deeper into the downward spiral of debt. With a prepaid credit card you can establish better spending habits and reduce your overall level of borrowing. Over time, this will start to manifest itself in a positive upward shift in your credit score.

The obvious drawback of prepaid cards, of course, is that you can only spend as much as you have at any given time. This can be inconvenient when you have a large, one-time expense you need to cover.