The Ins and Outs of Prepaid Credit Cards

Prepaid debit cards, which allow a customer to spend, based on amounts deposited onto the card, are a relatively new invention in the world of credit cards.  They were established by credit card companies as these companies wanted to find a way to provide alternative financing for at-risk credit card consumers.  The at-risk borrower was generally considered to great a risk to extend credit card privileges to.  When they first came about, they were distributed in the form of secured credit cards.  Customers had to put down a certain amount of money for access to the credit card.  The credit card limit or credit card balance was directly related to how much was put down.

Soon after a customer had demonstrated responsibility with the credit card, the card limit would often be increased.  The credit card issuer has used the security of prepayment to let the customer establish a satisfactory payment history.  Now, the credit limit can be increased above that of the amount of funds deposited as security for the card.

When the concept caught on, credit card companies decided to convert their secured credit cards into the prepaid debit card that is popular today, (though the previous secured format is still available for those interested…they are just a separate type of credit now).  With the new credit card, customers would have a line of credit that worked like a prepaid phone card.  This means the amount of money they have accessible to them is determined by how much they pay upfront on their card.  Funds could be deposited with the credit card online, on the telephone or at a bank associated with the card. 

Why would a person opt to use a prepaid debit card over their ATM debit card?  Well, unlike an ATM debit card, prepaid debit cards allow a person to build up their credit history.  Credit reporting bureaus view prepaid debit cards in the same light as credit cards, despite the fact that the former does not charge interest fees.  So, individuals who have bad credit or no credit can use prepaid debit cards to substantially improve their credit and credit score. 

The prepaid debit card is also an excellent budgeting tool.  With an ATM debit card, a person has 100% access to all of their bank account.  It is not hard to spend over one’s intended budget when using an ATM debit card.  In fact, with most banks offering overdraft ‘protection,’ overspending with an ATM debit card could rack up all kinds of annoying NSF fees.  This does not happen with a prepaid debit card.  If a person does not have enough money to cover a purchase, it just won’t go through.  They will have to put more funds on their credit card to make it work again.

What are the disadvantages to using a prepaid debit card?  Well, the most obvious disadvantage is that a person has to pay to use it.  With credit cards a high credit limit can be granted regardless of any upfront money a person has available.  Another disadvantage is in the area of theft.  Companies offering prepaid debit cards often are much stricter in determining whether or not theft really occurred when a prepaid debit card gets stolen.

Yet, overall, prepaid debit cards are a great way to help establish a credit history without worrying about monthly credit card bills.  Credit card lovers may not like the fact that in order to use a prepaid debit card one must invest their own money, but if one really thinks about it, money investment is also required with ‘regular’ credit cards.  Sure, it’s not upfront, but it still gets taken out, as it can take years sometimes even decades before a typical credit card balance gets paid off.