March 12, 2009
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Prepaid Cards (101), Pt.1
Compared to credit cards.With the current turmoil in the credit card industry, many people are searching for alternatives. One of the common alternatives people are considering is ‘prepaid cards' There is some mystery to these cards since most of us are more familiar with the behaviors of traditional credit cards. So, it may be helpful to explore the similarities and differences between ‘prepaid cards' and traditional credit cards:
- Safer: One of the first notions that comes to mind is that they are safer then credit cards. In many respects, this is true.
1) Backed by major issuers: Yes, they are backed by major issuers like Visa MasterCard and Discover credit cards. Also;
2) Used like a credit card: There's not much to learn, they pretty-much act like ordinary credit cards when shopping.
3) Can't be ‘over-charged' nor ‘overdrawn': This is a significant protection. Because they can't be ‘over-charged' nor ‘overdrawn', the consumer is greatly protected from one of the most serious infractions of normal credit card holders. The associated penalties found in most other types of cards are usually stiff. Not so, with prepaid cards. When the card dries up, it simply stops spending. A consumer can only spend up to the amount that's on the card.
4) Credit score unaffected: The ‘safe' part here is that prepaid card usage is not reported to the credit bureaus so your score won't be lowered by mis-use of the card. 5) Make great ‘sandbox': This feature is import to control risk. Great for teenagers and, even adults who are ‘frugally challenged' or who live in environments where theft is prevalent.- Trade-offs: Even though some safety is afforded, it doesn't come free. You may escape the exorbitant ‘over-the-limit' and ‘default' penalties and the finance charges of credit cards but the creative minds that devised this avenue were not without motive to get them in some other ways.