Prepaid Credit Cards: The Slightly Safer Version Of Debit Cards
Prepaid Credit Cards 101
Prepaid credit cards are gaining popularity as gifts and as tools for managing personal finance. The premise behind prepaid credit cards is that they are activated via the addition of funds, which are then depleted with each purchase until the card is "empty." Unlike gift cards, which can only be used at the issuing store, prepaid credit cards are accepted anywhere that a particular credit card is accepted, giving the recipient more flexibility with regards to the purchase choices. This also makes them an ideal way to control monthly spending.
Since the purchases made with a prepaid credit card have already been funded with a cash deposit, it is not possible to overspend your cash reserves with overzealous credit card swipes (when they need to be paid off later!).
Debit Cards In Disguise
Despite how appealing prepaid credit cards may sound, they are actually debit cards that only differ from regular bank-issued debit cards in that they do not draw directly from your bank account. To this extent, you are protected from having your checking account accessed and drained if your card is stolen; however, many of the drawbacks of debit cards (inability to dispute charges or replace funds that have been stolen) apply to prepaid credit cards as well.
Using Prepaid Credit Cards Wisely
If giving a prepaid credit card as a gift, pay close attention to the expiration clause. Many cards will begin to forfeit funds after a certain period of time (usually a year); if the card you are giving has this type of policy, be sure to make the recipient aware of this so that they can plan their purchases accordingly.
If you are using prepaid credit cards as a financial management tool, there are more caveats to be aware of. Many of these cards have a monthly management fee that will be waived if you have funds direct deposited to your account.
There may be other fees or account maintenance charges that are assessed if you do not maintain a minimum balance or other meet other requirements. Pay close attention to how you must maintain your account in order to avoid paying unnecessary fees.
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