Prepaid Credit vs. Prepaid Debit
One of the biggest trends right now in personal finance is the move toward prepaid cards. These are cards, debit or credit, that allow you to “load” a certain amount of money, and then use it. The idea is that you can use them conveniently, anywhere that accepts major credit cards. It is important, though, to make the distinction between prepaid credit cards and prepaid debit cards:
Prepaid Credit Card
Prepaid credit cards are basically secured credit cards. You have a certain amount of money in reserve, as collateral, that is used to secure your credit card in the event that you default. If you don’t have good credit, or if you are trying to build credit, this type of prepaid service can be a good idea. This is because you will make regular payments to the credit card issuer, and the issuer will then report your payments to the credit bureaus. After a while, your credit can improve to the point where you can qualify for a “regular” unsecured credit card.
When you have a prepaid credit card, you will likely pay a high interest rate, and there could be other fees associated with the card as well. Improving your credit is likely to lead to lower interest rates on your debt later on.
Prepaid Debit Card
A prepaid debit card works when you load it with funds. Then money is debited from the card as you use it. You don’t pay interest, since the money is yours — and not borrowed. The prepaid debit card, like the prepaid credit card, works anyplace that accepts major credit cards, so it is convenient to use.
However, most prepaid debit cards come with a plethora of fees. You may not pay interest charges, but you will pay a fee to reload the card, check your balance on the card, and you might even pay a monthly fee. And that’s just to start. It’s important that you understand the fees involved before getting a prepaid debit card.
Also, understand that your payment activity will not be reported to the major credit bureaus. A prepaid debit card will not help you build or rebuild your credit. You should keep this in mind. If you are looking for a way to improve your credit, and you don’t qualify for a more traditional credit card, you will need a secured/prepaid credit card, rather than a prepaid debit card.
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I used a prepaid credit card when I needed to rebuild my credit. It seemed to work pretty good because within a year I got offers from other credit companies for cards. I liked how I didn't have to go credit card free until my credit was better. I used Capital One. I had decent service and when I wanted to upgrade later I had no issues.
Like Barb mentioned too, it is a good way to ensure you don't go over budget as well.
In spite of the fees, the prepaid credit cards seem to be a decent idea to build some credit and avoid over charging on the card.
These cards may become even more popular now that banks are charging for debit card usage.
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