Consumers are constantly looking for affordable — and predictable — ways to manage their money. One option that seems to be gaining in popularity is prepaid credit cards. But it is a good option for you? The answer is as individual as the financial situations each of us faces.
A prepaid credit card is just as it sounds: You “deposit” whatever dollar amount you’d like onto a card, and you then use the card to make purchases. As you spend, your purchases are deducted from the total balance. When the balance gets low, you can reload the card with more money. Because prepaid cards are usually associated with one of the major credit card networks — Visa, MasterCard, etc. — they can be used anywhere those cards are accepted, including paying bills online and to get cash from an ATM.
While not a true replacement for credit cards, a prepaid card does offer some benefits, including:
No minimum balance. You do not have to maintain a minimum balance in a specific account that is tied to the prepaid card. You only load money onto the card if/when you want to.
FDIC insured. If you secure a prepaid card through an FDIC-insured bank, the funds on the card are also FDIC insured. This is a great protection for your deposit, because if anything happens to the bank while you are maintaining a deposit for your prepaid credit card you can still get your money back. Note that the FDIC insurance limit is $250,000 per person.
Teaching vehicle. Because you can’t spend beyond the loaded value, the prepaid credit card can be a good first card for teens who can learn to use the card judiciously without the temptation of a spending spree. It won’t help build credit, as prepaid card activities aren’t tracked by the credit bureaus, but it can keep a teen from making a big mistake with a credit card.
No Credit. No Problem. If your credit history is questionable or nonexistent, a prepaid card may be just the ticket as there generally is no credit check to qualify. You are spending your own money, and the bank is not providing you a loan. For this reason, the application process is simple and can be done completely online.