The Dark Side of Prepaid Credit Cards

1. They Don't Do Anything For Your Credit

Some people have made the mistake of confusing prepaid credit cards with secured credit cards and then regretting it when the damage was already done. It's important to understand that there is a huge difference between these two financial tools.

The only real similarity between secured credit cards and prepaid credit cards is that both of them require money up front and the amount you supply determines your available credit (or balance). That, however, is where the similarities end.

Unlike secured credit cards, prepaid credit cards do not offer a revolving line of credit, you do not earn interest on the money that was used to establish your initial credit line and your account activity isn't reported to the credit bureaus.

All things considered, prepaid credit cards are not a good idea if you want to re-establish your credit history or establish a revolving line of credit. However, if you want to give someone a gift or put your child's allowance on plastic, prepaid credit cards might be a solution.

2. The Good, The Bad and The Ugly

Like most financial tools, not all prepaid credit cards are equal. Some are good, some aren't so good and some are downright ridiculous.

Before purchasing prepaid credit cards, it's essential that you know the terms of the card you're buying. Believe it or not, some prepaid credit cards not only charge a monthly fee, they actually charge you money every time you use the card.

If you charge your $4 coffee house order with your prepaid credit card, you might actually be paying $5 for that cup of joe after the credit card company tacks on their $1 fee. Then, to add insult to injury, the credit card company may bill you almost $10 a month for the privilege.

Make sure you are familiar with ALL of the fees (including monthly fees, transaction fees, deposit fees, etc.) before committing to any prepaid credit cards.

3. Where'd It All Go?

So you get a prepaid credit card for $50 and you have it in your wallet for a four or five months. Then one day you go to use it on a $30 purchase but the card isn't working. You call to find out your balance and you realize it's less than $20. How did it happen?

Well, if you're not careful, those monthly fees can quickly add up. If you buy a prepaid credit card with a monthly fee of $6.95, after five months that card is going to have incurred charges of $34.75. That means your $50 card now only has an available balance of $15.25 and you haven't even used it yet!

Remember, when dealing with prepaid credit cards, what seems like a nominal fee can really add up over the months and you need to be careful. Not all prepaid credit cards are bad, but if you aren't careful and you don't look at the small print, you may end up with one of the ugly ones.

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For more tips on getting the best prepaid credit cards, saving money and avoiding getting taken, check out CreditCardTipsEtc.com, a website that specializes in providing credit card tips, advice and resources. www.creditcardtipsetc.com/prepaid_credit_cards/