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Pre-paid Credit Cards
Pre-paid credit cards are designed to help people build or repair their credit. However, pre-paid cards work differently than regular credit cards. This article will explain how pre-paid credit cards work and review the pros and cons of using pre-paid credit cards.
One of the more interest concepts for many is the idea of pre-paid credit cards. These are meant to help people build or repair credit, and can be seen as valuable teaching tools when it comes to money. It is important to note that, although they are referred to as credit cards, pre-paid credit cards are not truly credit cards.
How pre-paid credit cards work
When it comes to using pre-paid credit cards, things are pretty much how they sound. You get a card – one with a credit card logo and one that is accepted as a credit card at merchants online and off – that you pre-pay. You add a certain amount of money to the card's account, and that serves as your available "credit line." When the money is gone, your card is rejected.
Pre-paid credit cards are actually more like debit cards. You have a set amount in the account, and when you use the card, the amount is deducted. In this sense, pre-paid credit cards are not actually credit cards. You do not borrow any money; it is not a loan like a traditional credit card. Additionally, you are not charged interest, since you are using your own money and not borrowing.
Building credit with pre-paid credit cards
Unlike a conventional debit card, however, pre-paid credit cards allow you to build credit in some cases. If you make regular "payments" the card issuer will often report this to a credit bureau. This can improve your credit score, since it is often reported as payment history on a credit card. To make regular payments, you add a consistent amount of money each month to the account by the "due date." For many people, this is usually the amount of money they have spent. It is usually a way of replenishing (or partially replenishing) the store of money available.
It is important to note that not every pre-paid card issuer will report to the credit bureaus. If you are using pre-paid credit cards to rebuild your credit or to establish credit, you should double check to make sure that it is being reported. Otherwise, the main advantage of pre-paid credit cards is not in effect.
Using pre-paid credit cards as a teaching tool
Many parents are turning to pre-paid credit cards as teaching tools for their children. They help their kids sign up for a card, and put an initial amount of money (usually between $300 and $500) in the account. The children then use the card to make purchases. They have to balance the monthly statements, and make their own payments when they spend money. It is a good way to get teenagers used to the idea of making payments on credit cards, and carefully considering their purchases so that they spend more wisely. As a bonus, it can be a way to get teens started at establishing credit.
Things to watch out for with pre-paid credit cards
As with any financial product, it is important to understand what you are getting into when you use pre-paid credit cards. Some card issuers charge annual fees or monthly service fees. There are also cards that carry dormant use fees if you do not carry out a certain number of transactions each month. Try to find pre-paid credit cards that do not charge such fees.
Also be on the look out for cards that allow you to go over the limit a little bit on transactions. These cards will often let you go between $100 and $200 beyond what is in your account. But this flexibility comes with a heavy price: high fees. Fees can be as high as $50 a transaction when you go negative on your account. Avoid cards that allow this.
Fees can be subtracted from your available balance, and can result in your card being rejected.
Before you decide on pre-paid credit cards, make sure you understand the terms and conditions, and make sure it makes sense for your personal financial situation.
Related Article: Secured Credit Cards >>
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