Prepaid Credit Cards Can Help Build Your Credit

What is a prepaid credit card?

In the current credit crunch, obtaining credit has become more difficult than ever. Even people who previously had no trouble applying for credit cards or loans are finding their applications turned down in this grim financial market.

Unfortunately, however, credit cards are required for many different transactions, from renting a car to making a hotel reservation, and it can be highly inconvenient to function without them. So what can you do if you’re one of the many people who can’t get a traditional credit card?

Consider a prepaid credit card.   A prepaid credit card may seem oxymoronic – after all, isn’t the point of a credit card that you can buy things without having the money up front? Oxymoronic or not, however, a prepaid credit card can help you to establish the good credit you need to build a solid credit history.

How prepaid credit cards work

When you sign up for a prepaid credit card account, you pay the available-credit limit of the card up front. For example, to get a prepaid credit card with a $500 limit, you deposit $500 when you open the account. You may also incur some nominal fees – usually $5-$10 – but after that, you’re able to use the prepaid card in the same way you would a traditional credit card. There won’t be any interest charges or monthly statements; although you won’t be able to make further purchases once you’ve depleted your balance.

Choosing a Prepaid Credit Card

The first thing that to look for in a prepaid credit card is a provider that reports your payments to one of the three major credit bureaus – Experian, Equifax or TransUnion. Having these payments added to your credit history is essential if you want to use a prepaid card to help build good credit. Not all providers offer this service, so it’s important to check before signing up.

Fees are another important consideration. Some account setup fees are to be expected, but be wary of providers who charge you every time you deposit funds or who charge a percentage fee for certain types of transactions. These fees charged by less scrupulous companies can cut into your prepaid balance very quickly; decreasing your spending power and the amount that you can buy using your prepaid card.

Some cautions about prepaid credit cards

Despite having some advantages, a prepaid credit card is not the same as a traditional credit card, and many payment processors are aware of this distinction. For example, services that require regular monthly payments – like your cable or cell phone provider – may be reluctant to accept a prepaid credit card for payment, because there is no guarantee that funds will be available in the future. Acceptance of a prepaid credit card for periodic payments is typically handled on a case-by-case basis – some providers will accept a prepaid card, and others will not. For this reason, it’s not recommended that you rely on a prepaid credit card as your only payment method.

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