As a part of my personal mission to teach people about the importance of credit, I’ve brought on the help of financial writer Michael Edmondstone. This week he discusses the pros and cons of prepaid and non-prepaid credit cards – both which can help you build credit, especially if it’s a little shaky.
Weighing the Pros and Cons of Prepaid vs Non-Prepaid Credit Cards
If you have taken on a lot of debt to fund your education or you don’t have any credit established, this is a debate worth having. Both prepaid credit cards and credit cards have their pros and cons, and whether you decide to get one will depend in large part on your financial goals. Delve into the differences with these ideas in mind.
Prepaid credit card advantages
First things first: verify that the card contracts that you are looking at are actually for prepaid credit cards and not debit cards. They may seem alike (both cards, after all, simply provide a way for you to use the cash you have deposited into an account), but prepaid cards actually report to a credit rating agency, which means that you can begin to establish or improve your credit with good card practices.
Prepaid credit cards also provide all of the convenience of a traditional credit card while you take the steps necessary to build a financial profile for yourself after graduation. You can use them at any merchant that accepts the particular card brand that you choose, with no one knowing that it is prepaid except you. And if you struggle with spending more than you have, a prepaid card can help with budgeting.
Also, if you have a high debt-to-income ratio due to student loans, credit card interest rates can skyrocket, only increasing the potential to get deeper into debt; with prepaid cards, you only need to pay set fees, so you’ll know exactly what it will cost you to use it.
Non-prepaid credit card advantages
However, there are several reasons why you might want to consider going with a traditional credit card. To start, you may have to pay a higher interest rate on your purchases with a regular credit card, but this is only if you don’t pay the balance by the end of your billing cycle. With a prepaid card, you’ll have to pay several fees — such as an account maintenance fee, a reloading fee, and transaction fees — each billing cycle, no matter how quickly you deposit more money onto the card.
A traditional credit card also offers more leniency when it comes to reaching your limit. While it’s true that you can be declined if you reach your spending limit on some credit cards, others give you the option of paying an over-the-limit fee if you spend beyond your credit line. This may not be a good idea if you are budgeting diligently to get out of debt and establish good credit, but it can also prevent the embarrassing scenario of not being able to pay for purchases because of a set limit.
You’ll end up making some sacrifices and reaping some rewards no matter what kind of card you choose. However, the best way to make a decision when it comes to getting a prepaid credit card or a non-prepaid credit card is to take into account what your financial needs are and make a plan to meet them responsibly.