money management

A credit card without debt?

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Does that really exist? We shall see.

Have you ever been offered a VISA or MasterCard that you can reload with your own money and thought to yourself “WOW that’s a great idea because I won’t get into debt”?  That is definitely a normal reaction, I mean seriously who wouldn’t love to have a credit card without the temptation to spend and get into debt?  I know I would.  This type of credit card is prepaid and it’s often confused with a traditional VISA or MasterCard.

Do you have a prepaid credit card?

Yesterday my Dad called me and said “I got a VISA today.”  I was shocked and secretly proud because over the last few years my Dad’s financial situation has been less than stellar.  To make a long story short my parents got divorced, my Dad wanted to keep our childhood home so he got into a lot more debt (by buying out my Mom) than one person should.  When you combine this with the overwhelming need to give your daughter everything she wants in hopes that you’ll be her favorite parent it’s a recipe for financial disaster.

Fast forward to my Dad selling his house and paying off all his debt.  You would think that’s a good thing right?  Well it normally would be, if the person worked towards rebuilding their credit score.  However my Dad went in another direction.  He moved in with his now girlfriend and let everything – and I mean everything – from the phone and the car insurance to the house and the cable be in her name.  This is not helping my Dad rebuild his credit.

What is a prepaid credit card?

Yesterday when my Dad was at the bank paying his monthly bills (yes he still goes to the bank) the teller offered him a prepaid VISA card.  She explained that he can use it worldwide where VISA is accepted as a payment method and he can load as much money onto it as he wants whenever he wants.  Since my Dad has been without a credit card for over three years he thought this was a good idea.

The truth is it can be because it gives people with less than perfect credit the option of online shopping as well as booking tickets and travel.  It opens a world of doors for payment options that normal credit card less people wouldn’t have.  Since the card is funded with actual money, not credit, there is no possibility of further harm to your credit score.

Is it really the best option?

So what’s the downside?  The exact same gift of a prepaid card is also the curse.  Since the credit card is loaded with cash or money transferred from a bank account or PayPal there is no credit.  Everyone is approved for a prepaid credit card because there is no approval process, but it also doesn’t help rebuild your credit score.

If your credit is less than perfect you may want to consider a secured credit card because as you use it each month and pay it off you will rebuild your credit score.  Photo from my Flickr

About the author

TK

TK is a Certified Financial Planner with over 15 years of experience in the banking industry. She started blogging in 2009 after the market crash. TK enjoys helping people plan their retirement, pay off debt, invest wisely, live on a budget and enjoy happy financial lives. You can see what she's up to on Twitter @TahnyaKristina.

2 Comments

  • I prefer to let them lend ME the money for 21 days, collect points and pay the balance off every month. Though prepaid have their place too. I’m not tempted to go into debt because I really can’t afford to pay interest, it’s not in the budget. I only buy regular necessities with it like groceries and petrol, it’s stuff I have to buy anyways. That way I earn points, have all the expenses categorized beautifully on the statement and pay it all only once per month! Since it’s a no fee card, it’s like a free loan for groceries, etc. That being said, I have to be honest and say that I have another card for internet, and occasional purchases. That one has a very low limit so I couldn’t go hog wild even if I wanted to. The secret for me is to tell myself, if I can’t afford it now, what makes me think I can afford it PLUS INTEREST later?!

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