4 Disadvantages of a Pre-Paid Credit Card

A pre-paid credit card may be issued by any credit card company, including major companies. Most people who seek this option do so because they cannot qualify for a regular credit card. There is no credit check required. Instead, you simply need to post funds to an account and then begin using the account. You are spending your own money. These can be used to make hotel or plane reservations or in other situations where cash is not accepted. However, there are several drawbacks with prepaid options.

#1 Set Up Fees

You will incur a set up fee. The fee is relatively small, typically less than $20. However, you may also have to post a minimum balance to the account to qualify. The balance can be as high as $500. For people who do not have the cash to meet the minimum balance, greater fees are assessed. Since most people applying for prepaid cards are low income or have bad credit, many borrowers will not be able to meet the minimum to open the account.

#2 Recurring Fees

Once you have the card, you must continually contribute funds to the account. Some cards will require you keep a minimum balance, or fees will be assessed. Further, each time you put more money into the account, you will have more fees to pay. These fees can add up, making the card as expensive as other forms of actual debt with interest rates.

#3 Do Not Build Credit

With a credit card, even paying interest pays off because you are building your credit as you go. This is particularly important for people who do not have good credit at the time they apply for a prepaid card. However, they will not be helped in this area even if they are using the funds responsibly. You are still paying fees, still managing your money, but you are gaining no more than if you made all of your transactions in cash. If you can qualify for a traditional credit card, it is a better option to use this any pay off the balance each month instead of using a pre-paid card.

#4 Cannot Make Recurring Payments

Even though the pre-paid card will help you in a lot of "cash not accepted" areas, you will not be able to use it to set up recurring payments. For example, if you would like to have your utility bill paid automatically each month, you may have to put down a credit card. Utilities companies, though, may not accept a pre-paid card because there are no guarantee the funds will be available when the bill comes due. With a normal bank account, the bill would be paid, and you would be assessed an overdraft in this case.

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