Prepaid Credit Cards

Understanding Prepaid Credit Cards

Credit cards are used in our lives today with several purposes in mind.  For instance when we rent cars, book plane tickets, or book hotels we have to have some type of credit card to make the reservations.  It is possible to book a reservation with your debit card from the bank or a prepaid credit card, but what if you don’t have the funds to cover the entire amount needed for the reservation in the bank account.  Did you know that rental car companies actual hold twice the amount needed for the rental?  They hold more than they need on the account just in case you are late brining the car back or in case you go out and try to spend too much with your debit card or prepaid credit card.  This means that for most purposes during vacations you really do need some type of credit card.  When you suffer from bad credit there are often many credit card companies that will refuse your application.  They see you as a risk.  So what do you do when you need a credit card, but can’t get one?  The answer is pretty simple you can apply for a prepaid credit card.  The prepaid credit card allows you to use it like a regular credit card without the annual percentage rates and annual fees.  Below we will look at how these prepaid credit cards can help you during vacations and how they can help you to redeem your credit over time. 

Prepaid credit cards work a little differently than regular credit cards.  In fact prepaid credit cards are opened by you depositing any set amount of money into an account.  It is basically like depositing into a savings or checking account.  Once you have the money in the account the prepaid credit card can be used like a regular credit card.  With prepaid credit cards you can only spend what is in the account.  In other words it is a debt card, but with a different purpose than the ones you are generally issued with a checking account.  You will be debiting the amount of money each time you use the prepaid credit card.  When the account is empty you are no longer able to draw on it and therefore your spending for the time is over with the prepaid credit card.  You can of course transfer more money into the account as you deplete it to keep the prepaid credit card constantly active, which is actually a good idea for our later look at increasing your credit.  So how does a prepaid credit card work?  With other credit card companies they charge annual percentage rates to make money, but how do they make money off of you with a prepaid credit card.  To set up the account you have to pay a fee for the prepaid credit card.  The amount of the fee will vary depending on the company you choose to have the card with.  You will also pay additional fees every time you deposit money into the account.  You will also find that prepaid credit cards cannot be used for monthly deductions for expenses.  In other words utility companies will not allow prepaid credit cards to be used as they don’t want to deal with the companies.  So let’s look at how these prepaid credit cards can benefit you with vacations.

Prepaid credit cards will work like a debit card with car rental companies.  Remember how I said that rental car companies keep twice the amount they need for the car rental to ensure that the bill will be paid when you returned the car.  Well with prepaid credit cards it is no different.  You will have to have the entire amount you need for the vacation.  This will include any deposits the car rental company, hotel, and other places may keep to ensure the bill is paid when you leave.  It can be a little frustrating because you may not have the entire amount you need for a vacation, on the other hand if you do have the amount you need you can be at ease at the end of the vacation knowing that you don’t have to pay off the bills in instalments and with interest rates.  You will find that with prepaid credit cards you do not have the normal fees associated with credit cards.  While some of the prepaid credit cards do have annual fees, and of course they all have the start up fee and deposit fee they are generally less than what you would pay for a regular credit card.  So with prepaid credit cards you can have a worry free vacation. 

I mentioned above that most often individuals who choose to have prepaid credit cards have bad credit.  When you have a bankruptcy, failure to pay monthly expenses, CCJ’s against you or other detrimental credit history you will have a hard time finding a bank that is willing to hand out a credit card with a limit.  Currently because of the credit crunch with mortgages and many banks struggling to make up money in several places it is difficult for those who have great credit to get a satisfactory card with a high credit limit.  The banks just aren’t willing to take the risks.  So many people are deciding to choose prepaid credit cards.  Prepaid credit cards can actually help you increase your credit.  But how can prepaid credit cards help with your credit, especially if you have CCJ’s against you or a bankruptcy?  First anytime you establish a new line of credit a bank is willing to take the risk.  This means that they believe you will use the line of credit wisely and increase your credit history score.  With prepaid credit cards because the money is in the account you are not able to increase your debt.  In other words your debt ratio is never hurt by having the prepaid credit card like it would be with a regular credit card.  Banks and credit card companies look at how much debt you have to income.  If you have more debt than income you are a risk.  If instead you have a prepaid credit card that reflects more income than debt you are in actuality looking like less of a risk to other lenders.