A prepaid credit card offers consumers a different kind of credit card experience.
Prepaid credit cards come with a spending limit and are useful for consumers with bad credit, as users can only spend up to the amount of money they initially put into the card. The term "credit card" in this case is somewhat misleading: The cards aren’t really credit cards, because they don’t allow a line of credit. The limiting function of prepaid cards makes them well-suited for teenagers, whose parents want to keep watch over their spending habits, and anyone who’s worried about saving money.
Since all prepaid credit cards work essentially the same way, consumers must choose between cards by comparing opening fees and potential benefits. Some prepaid cards charge a fee to open them, usually between $5 and $10, so try to find a card that keeps this fee to a minimum or doesn’t demand one at all. Be aware of any hidden fees: Some cards charge users for adding money, withdrawing money, replacing lost cards or even calling customer service.
Determine where you can use a prepaid card. For example, rental car companies allow you to reserve a car with some prepaid cards, but not others. Other businesses, like Internet providers or other places that involve regular billing, might not let you sign up with a prepaid card because of the chance that the money could run out before they collect. A card associated with a major credit card company, such as Visa or MasterCard, will probably work at most places. Each of these also comes with different perks: Some allow you to open a card without a bank account, while others don’t demand a minimum balance. Finally, some cards come with a rewards program that allows users to collect points as they spend with their prepaid card.
Consumers interested in signing up for a prepaid card can apply online with Visa, MasterCard and other major providers, making sure that the banking institution is legitimate first. The signup process is very simple: Fill out a form with your personal information and sign over a certain amount of money using a check, money order or bank wire transfer. No prepaid cards demand a credit check, and some will let you sign up with any amount of money, though if the card requires that you pay a fee each time you deposit, it probably makes sense to start with a larger amount.
Prepaid cards have many practical advantages, especially for people with bad credit. However, if you’re interested in improving your credit, a prepaid card can’t help you. Because there are no late fees and no bills to keep up with, prepaid card companies don’t report to credit bureaus.