In essence, a prepaid credit card is a debit card. The cardholder funds the card in advance of a purchase by adding money to the account from which the pre paid card draws money. There are advantages and disadvantages to using a prepaid credit card.

Advantages of Using Prepaid Credit Cards

The number one advantage to prepaid credit cards is that the applicant does not have to undergo a credit check. Just about anyone can open an account to enjoy the benefits of a prepaid credit card. There is no annual fee, zero percent interest and no monthly credit card bills to look forward to.

Prepaid credit cards come in handy when purchasing items online and in person at retail stores. While the prepaid credit card looks and behaves just like a standard credit card in most cases, one big difference is that the cardholder cannot overspend. In other words, the credit limit is bound by the amount of money in the bank account. It’s a nice way to learn to live within one’s means.

Disadvantage of Prepaid Credit Cards

Pre paid credit cards do nothing to improve the cardholder’s credit standing. Since the credit card activities are not reported to the credit bureaus, individuals looking to build or reestablish credit after a bankruptcy should seek other credit alternatives.

Another disadvantage to prepaid credit cards is that the cardholder may only charge the available limit in the account. While it is listed as an advantage, it is also a disadvantage. If an unexpected emergency happens that exceeds the limit in the account, the cardholder may not charge more than the limit in the account and therefore must find other ways to finance the emergency.

Unexpected Prepaid Credit Card Fees

Consumers should shop around for prepaid credit cards because they are not all the same. Some credit card issuers charge a fee if the cardholder does not open an account with the bank. Additionally, some banks charge a fee for cards that are not pre-funded through direct deposit.

As with most transactions at an ATM machine, prepaid cards are charged ATM fees, but many cardholders are not aware that many banks charge a monthly fee if the account is inactive for an extended period of time. Depending on the issuer, cardholders may also incur fees for speaking to a bank teller while others charge fees for customer service calls.

Baby Phat Prepaid Visa RushCard, for instance, charges a one-dollar fee for each online purchase (capped at a $10 per month). They also charge a one-dollar retail purchase fee, which is also capped at $10 per month. It is very important to read the fine print before signing up for a prepaid card.