Credit Cards

Three Misconceptions About Prepaid Cards

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If you’re feeling a bit fuzzy about what prepaid cards can (and can’t) do for you, you’re not alone. There’s a lot of conflicting information out there right now. Let’s take a look at three common misconceptions and debunk a few myths.

Misconception #1: Prepaid cards can help you qualify for a credit card

 
If you’re considering getting a prepaid card because you can’t qualify for a credit card, I understand your dilemma. But keep in mind that prepaid cards—that is, cards that don’t offer credit but are instead preloaded with your own money—will not help you qualify for an unsecured credit card. A secured credit card, on the other hand, is a credit-extending card that is backed up by a security deposit you’ve placed in a bank account. Keeping up with your payments on a secured credit card can help you eventually qualify for an unsecured, traditional credit card.

Listen, I know this can get a bit confusing because some prepaid cards claim to help build your credit history. They say this because they report to PRBC, an agency that reports alternative data like rent and utilities. If you’re in the market for a mortgage or an apartment rental, a solid PRBC standing might help you a little. But keep in mind that the major credit card issuers are primarily concerned with your credit history as reported through one or more of the three major credit reporting bureaus (Equifax, Experian and TransUnion). Prepaid cards do not get reported to these three bureaus.

[Credit Card Roundup: Credit Cards for Rebuilding Credit]

Misconception #2: Prepaid cards are simply prepaid credit cards

 
This problem is perpetuated in two ways. First, there’s a logo on the card, such as MasterCard or Visa. This merely indicates which payment processing network is being used to facilitated your transaction. Likewise, when you press “credit” on the keypad when you check out, you’re not engaging in a credit card transaction but rather ensuring that your transaction gets processed through your card’s payment network (e.g., Visa). Again, your prepaid card is loaded with your own money so you’re not actually buying anything on credit.

Second point of confusion: there are major financial websites that get this wrong. I’m not naming names, but if you’re a big web site, please check the way you’re referring to these cards. There is no such thing as a prepaid credit card. If it’s prepaid, you’re not buying on credit. (If your card is secured, however, you are in fact buying merchandise on credit.)

Misconception #3: Prepaid cards are a great way to teach teens about plastic

 
I used to buy into this one until my teen said to me, “Mom, this card sure has a lot of fees!” I’d even chosen a card with relatively few fees, but before I knew it, the cost was getting ridiculous. I wanted to experiment with a prepaid card, but for our situation, I discovered it didn’t make sense.

These days, I recommend getting your teen a debit card that’s linked to his or her own checking account. Many banks have special accounts for teens where parents have the ability to set limits on purchases and withdrawals. It’s more convenient for all of you, it’s cheaper, and your teen gets real practice spending within a budget. But don’t get overdraft protection. The idea is to teach them to monitor accounts and know how much they’re spending.

Once teens grasp the concept of using plastic and staying within a set amount, teaching them about credit cards become much easier.

Image: Ready Debit

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