Prepaid Credit Cards

The advantages and drawbacks of prepaid credit cards...
Enlarge ImagePrepaid credit cards are useful for people whose applications for regular credit cards were unsuccessful. The reason for such a rejection is invariably a bad credit rating. Not owning a credit card is a major drawback when it comes to making reservations for hotels, motels, car rentals and airline flights. One also needs a credit card to place orders online, or telephonically. With a prepaid credit card, one can still make all these transactions – but there are limitations.

One opens a prepaid credit card account by depositing money into its account in the same way that one would make a deposit to open a checking or savings account. Once this amount registers on the account, the applicant receives a prepaid credit card. The owner can use this prepaid credit card in the same manner and in all the same places as a normal credit card.

Probably the biggest advantage in using a prepaid credit card is that one can only use the money one really has in the account. Once the money is exhausted, the user cannot spend any more until the deposit in he or she replenishes the prepaid credit card account. This also means that there are no bills and no interest charges to consider. The principle is similar to that of using a debit card that a bank issues in connection with a savings or checking account.

As already mentioned, a prepaid credit card has some limitations. Apart from the fact that one cannot charge more than what one really has, the user has to pay a fee to establish the account. The payable amount to open a prepaid credit card account varies from bank to bank. Further, the applicant will have to pay additional fees every time he or she deposits more cash into the prepaid credit card account. Nevertheless, a prepaid credit card is usually the only viable option for a person with bad credit. With such a credit card, the user can reserve rental cars or hotel rooms without having to worry about credit card bills and interest payments afterwards.

Another limitation of a prepaid credit card is that the owner cannot use it to pay for a monthly Internet subscription, or to make a purchase on monthly installment payment terms. Businesses that offer such arrangements are usually averse to allowing the use of prepaid credit cards. This is because of the possibility that a prepaid credit card holder will have no money in the account when the bills are due for payment.

All said and done, a prepaid credit card is still a useful way out for those with bad credit ratings. It is a fact that one needs a credit card to get by in today’s world, and a prepaid credit card does offer most of the advantages of a credit card. Even the limitations can work to one’s advantages, because they equal better financial control. In fact, using a prepaid credit card often cures all the inconsistencies in spending habits that led to bad credit rating in the first place!

A variant of the prepaid credit card is the student version. With these one can allocate a certain amount of money for credit charging to one’s child who is studying at college within or outside the country. Many parents find it a very useful tool for allocating a pre-set allowance to their children.
By Arun Chitnis
Published: 4/23/2007