Is a Prepaid Credit Card Really Beneficial?

What is a Prepaid Credit Card?

When you think about a prepaid credit card it may sound as if you’re being extended credit. This is misleading as the card is similar to a debit card or gift card. If you want to make a purchase using the card, then you must deposit funds in the account. As you use your card for purchases, it’s reducing your balance so if you deposit a balance of $300 and make of purchase of $150 then you’re left with a balance of $150. It’s a lot more like managing a savings or chequing account than it is a credit card.

Why would one use a Prepaid Credit Card?

You can get this type of card regardless of your credit history so an individual who has a poor credit history and does not have a credit card may get the card to make online purchases where one is needed. As the card is not used through credit, there are no interest fees associated with it. A company may want to use this type of card for their employees who travel or entertain clients as it’s a great way for them to control costs when away from the office. Some parents may purchase the card as a tool to educate their children about the use of credit cards.

Fact about Prepaid Credit Cards

If you have a bad credit history, the prepaid card will not help rebuild your credit so you should weigh out your options before making the purchase. A better solution for you may be to apply for a secured credit card.

Are these cards really teaching our children how to manage money?

Some cards have no minimum age requirement and the terms for the cards are unfavourable. If the card purchased has an expiration date and a balance still remains, then you will lose that balance. There are also many high fees associated with these cards. There are activation and set up charges, charges for reloading the cards, monthly transaction fees, charges for customer service, charges to check your balance and these fees are taken from your balance, leaving you with less money to spend. In actuality your child is losing money rather than gaining financial awareness. A better alternative to teach your child about finances is to open a chequing or savings account with no monthly fees, where you can deposit and withdraw money easily and watch your savings grow!

Prepaid credit cards have become so alluring with their favourite characters or stars who can raise awareness for all sorts of issues but when it comes to our finances, especially ones that come with such high fees, maybe it’s just best that this level of education lies in our hands.

By Suzana