Prepaid credit cards are a way around for consumers with poor credit history. With lenders and banks rejecting applications of consumers with bad or marginal credit and the new Credit CARD Act 2009 in action, prepaid credit cards provide the ideal solution. In a complex business environment where you need a credit card for almost all important transactions, whether it is booking an airline ticket or making hotel reservations or even shopping online, not having a credit card might just put you in a spot. This is where pre paid credit cards come in.

Pre Paid Credit Card – How Does It Work

A pre paid credit card is much like opening up a savings account and linking a debit card to it. In order to activate your prepaid credit card you will need to open up an account and deposit funds into it. Your prepaid credit card is linked to this account and you can use it just like any other normal credit card. Once you have exhausted the funds in the account, you will no longer be able to make transactions on your prepaid credit card until you deposit funds in the account again. This is ideal for individuals with poor credit histories owing to the fact that prepaid credit cards for bad credit consumers give you the freedom of a credit card without the attached liability. Consumers must remember that when they initially deposit money into their prepaid credit card accounts they are charged a deposit fee of around $5-$10. This is a recurring fee and is charged every time consumers deposit money into the account.

Difference Between Pre paid Credit Cards And Debit Cards

In essence there is no real difference between prepaid credit cards for bad credit consumers and debit cards so to speak. Neither of these cards affect your FICO score as they are directly linked to accounts which have funds in them. Pre paid credit cards just as debit can be used almost anywhere, except car rentals, where debit cards cannot be used. Another difference between the two cards is that prepaid credit cards charge you a deposit fee every time a deposit is made into the account, whereas debit cards do not.  Prepaid credit cards are for individuals with either a poor credit history or for those who do not wish to have a liability of a credit card but want all its features. Debit cards are more popular among teenagers and students, owing to its no liability factor and you only spend what you have.

Prepaid Credit Card For Consumers With Very Poor Credit – Advantages

Prepaid credit cards for consumers with very poor credit has its advantages.
•    Consumers can only spend what they have in their prepaid credit card account and once they have exhausted the funds, the prepaid credit card cannot be overdrawn.
•    Pre paid credit cards do not affect your FICO score in any way therefore avoiding the worry of a credit card balance affecting credit reports.
•    Prepaid cards are beneficial for customers who want to curtail their spending habits yet would like the features and freedom of having a credit card.

Pre Paid Credit Cards For Bad Credit Consumers – Disadvantages

While pre paid credit cards for bad credit consumers have their advantages, these prepaid cards have their drawbacks too.
•    Consumers are charged a deposit fee every time they deposit funds into the prepaid credit card account.
•    Certain online merchants do not accept prepaid credit cards as payment. This stems from the fact that they are unsure that the prepaid credit card will be able to cover the transaction.
•    Obtaining goods on prepaid credit cards via finance can be very difficult as instalments are deducted from credit cards at fixed intervals of time and retailers or merchants may not accept prepaid credit cards as a repayment options.
For bad credit and poor credit consumers looking for the freedom of a credit card but attempting to avoid the credit card debt, a prepaid credit card is a good option to use until you get your credit report back on track.

Reference:

1. What Are Prepaid Credit Cards – WiseGEEK