What are prepaid credit cards?

First of all, it is important to note that even thought they are marketed as credit cards, prepaid cards are not technically credit cards. This is because you do not actually get a line of credit or a loan. Instead, you "load" the card with a set amount of money. It is even possible to get prepaid cards that allow you to automatically transfer money from your bank account to your prepaid credit card. In reality, prepaid credit cards are much more like debit cards than they are like regular credit cards.

Prepaid credit cards, even though they function more like debit cards, are often issued by credit card issuers. Major banks and credit card companies often issue prepaid cards that you can use. Additionally, they can be used to help you build up your credit. If you are a student, teenager or if you have bad credit, a prepaid credit card may help you make substantial improvements to your credit score. This is because many issuers of prepaid cards report to the credit bureaus when you make regular, on time payments to your card account.

Benefits of prepaid credit cards

So, why not use a debit card instead? Well, there are some specific benefits associated with prepaid credit cards:

1. Many card issuers will report regular payments to credit bureaus. This can help your credit score, while having a debit card does not. For students and teens, it can serve tohelp establish a credit history.
2. Prepaid cards are accepted everywhere that credit cards are. This means that they can easily be used around the world, at most ATMs and provide the same sort of convenience as credit cards.
3. You cannot get into debt. While there are some prepaid credit cards that will let you overdraw by a certain amount (you will be charged a fee), many cards restrict your use when you run out of money. And since it is your money that you have already put onto the card, you are not going into debt.
4. Prepaid cards allow teens and students to learn how to handle credit cards. If you make your teen or student responsible for adding money to the card, in regularly monthly payments, prepaid credit cards can be a great tool. It can also teach them to keep track of their spending and how much money they have.
5. No credit check required to get a prepaid card.
6. No interest rates. Fees may applied to the card, but because it is not a line of credit -- not a loan -- you do not have to pay interest when you use a prepaid credit card.

Things to watch out for when applying for prepaid credit cards

While prepaid credit cards can be very helpful for many, there are some things to be aware of. Not every issuer does things that same way, and you should shop around before deciding on a prepaid card. Here are some things to be wary of as you look for prepaid credit cards:

Fees. Some prepaid credit cards come with fees. These fees can include enrollment fees, periodic maintenance fees (annual or monthly) and non-use fees. Additionally, if you exceed the amount of money you have in your card account, you may find that you are charged fees. Carefully read the fine print to find out what sorts of fees the issuer is likely to charge you before you decide on a prepaid card.

Protection. Prepaid credit cards do not always come with the same protection as other credit cards. Indeed, the same sort of liability against identity fraud or loss may not apply. Find out what your liability is if the card is lost or stolen -- or fraudulently used.

Minimum balance. In some cases, you are required to maintain a minimum balance. This means that if your card account falls below the stated minimum, you may be subject to a fee. Make sure you understand any minimum balance rules that may apply.

Prepaid credit cards, although not actually credit cards, can nevertheless be very helpful. The key is to shop around and find the card with the lowest fees and the most generous terms.