Prepaid credit cards provide consumers with access to a line of credit without the financial risk of traditional credit cards. Prepaid credit card issuers require cardholders to deposit funds in a non-interest-bearing collateral account that serves as a hedge against default. People with poor credit or those who are just starting credit building can benefit the most from prepaid credit cards, but anyone can use them to keep their spending and debt in check. Prepaid credit cards come with the ability to set up recurring charges, which provide their own advantages.
Prepaid Credit Cards Help Build Credit
Many prepaid card issuers report cardholders’ payment history to one or more of the big three credit bureaus. If you have experienced credit setbacks, such as late or missed payments, bankruptcy, foreclosure or loan defaults, a prepaid credit card provides a way to regain your positive credit history. If your credit file is thin or doesn’t contain many long-term accounts, a prepaid credit card will help get your credit history off to a positive start. Keeping the card’s balance low and paying it off in full, or paying as much of the total as you can, each month is the best way to build positive credit history.
With prepaid credit cards, your credit is limited to the amount you deposited, usually $200 to $1,000, but sometimes up to $10,000. This ensures that you can only spend what you have and don’t get in over your head. Some card companies will only allow a credit limit that is 90 to 95 percent of your deposit amount to help cover interest and fees if you fail to pay. Even this additional fail-safe works in your favor, as it helps you avoid further financial burden if you happen to default.
Bills Paid on Time
Recurring charges for bill payments provide you with a hands-off method of ensuring that your bills are paid on time each month. Automatic payments not only help you avoid late fees and service interruptions, but they also help you stick to your budget by taking the money out of your reach before it starts to burn a hole in your pocket or before impulse spending wipes out your funds. If your prepaid card comes with rewards, such as airline miles or cash back, the recurring charges are included in your reward point totals.
Avoid Payment Service Charges
By using your prepaid credit card for recurring charges, you can often avoid the fees some companies charge customers to pay their bills online or over the phone by credit or debit card. Many companies will waive these fees for people who set up automatic payments to reward customers who provide them almost guaranteed payment. Although payment service charges are usually $5 or less, these savings can add up over time.
Lauren Treadwell studied finance at Western Governors University and is an associate of the National Association of Personal Financial Advisors. Treadwell provides content to a number of prominent organizations, including Wise Bread, FindLaw and Discover Financial. As a high school student, she offered financial literacy lessons to fellow students.