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What are prepaid cards?
Prepaid debit cards offer a way to pay for expenses without carrying cash or opening a line of credit with a lender. Once you make a deposit into an account, you can immediately use the card to shop in all the same places credit cards are accepted. There’s no need to worry about debt, because spending is limited to the amount of money deposited on the card.
Things to consider before applying for a prepaid card
Make sure to read the fine print before you apply for a prepaid debit card. Some of these cards have activation fees and monthly maintenance charges, which can eat into your spending cash. Compare cards thoroughly and shop for a card with no costs.
Advantages of prepaid cards
There’s no credit check necessary in order to apply for one of these cards, meaning those will low credit scores can reap the benefits of these cards while establishing responsible credit habits. Because you’re limited to spending your deposit amount, prepaid cards make it easy to stay on budget and cut back on monthly spending.
Disadvantages of prepaid cards
Many prepaid credit cards have fees attached to them and limitations on transactions. Prepaid cards won’t help build your credit because they do not report to the credit agencies, making secured credit cards a more attractive offer for helping you boost low credit scores over time. Prepaid cards also offer very limited rewards incentives compared to most major credit cards.
Who should get a prepaid card?
Prepaid cards and debit cards allow cashless shopping without a credit check, making them ideal for parents with teenage children, those with low credit scores and those who are wary of going into debt. With these cards, you only spend the money that you deposit, giving you the ability to track your expenses and easily limit your spending.
If you’re looking for a way to build credit, prepaid cards are not a good option for you. In order for your credit score to improve, you have to prove that you are creditworthy by effectively managing a line of credit. Because prepaid cards aren’t technically considered a line of credit, your spending habits aren’t reported to credit agencies.
Senior Editor Barry Bridges has been writing about credit cards, personal loans, mortgages and other personal finance products since 2017. Before joining Bankrate, he was an award-winning newspaper journalist in his native North Carolina. Send your questions about credit cards (and fantasy baseball) to firstname.lastname@example.org.
Have more questions for our credit cards editors? Feel free to send us an email, find us on Facebook, or Tweet us @Bankrate.