If bad (or a complete lack of) credit is making it tough for you to get approved for a credit card, a prepaid card may seem like a decent option. After all, there's no approval process, and you'll never rack up any more debt while using it, right?
While both of these things are true, prepaid credit cards also have their share of drawbacks, and it's important to know what those are before going in. In this article, we'll cover:
- What is a prepaid credit card?
- Do prepaid credit cards have fees?
- Will a prepaid credit card help me build credit?
- Other things to be aware of
- Alternatives to prepaid credit cards
So, let's dive in!
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What is a prepaid credit card?
A prepaid credit card is one issued by your provider which comes with zero credit attached. In order to use one of these cards, you must load your own funds onto it, essentially using it as you would a debit card, but allowing you to make online purchases or any other transactions that would require credit card information.
Because there's no lending involved in prepaid credit cards, banks don't require an approval process or credit check to obtain one, making them very accessible to those who may otherwise have a tough time meeting the requirements of other credit cards.
Do prepaid credit cards have fees?
Prepaid credit cards often come with a lot of fees attached. These can include (but are not limited to):
- Activation fee
- Purchase fee
- Balance checking fee
- ATM withdrawal fee (in addition to whatever fee the ATM itself charges)
- Card replacement fee
- Card reload fee
- Overdraft fee
- Transfer fee
- Inactivity fee
Adding up all those extra costs, a prepaid card becomes less than ideal for someone living on a fixed income. The more you're spending on fees, the less cash you'll have on your card to use for anything else.
Each provider is different, however, so check with them to find out exactly what extra costs you'll be taking on with the prepaid credit card they offer.
Will a prepaid credit card help me build credit?
One of the biggest drawbacks to owning a prepaid credit card is that using it will do nothing to help build or repair your credit score.
Your credit score is largely determined by your personal history as a borrower and user of credit. This history includes information such as: how long you've owned credit cards, how many credit cards you own, and most importantly, how timely you are at paying your bills. Lenders will use this information to decide how much of a borrowing risk you are, as they're going to be less likely to approve you for a credit card if you have a history of not repaying debts and missing payments.
To improve or build your credit score, you need to prove to lenders that you can responsibly manage the credit that you've borrowed. A prepaid card doesn't allow for that as it's loaded with your own funds rather than credit borrowed from your bank. Because of this, it won't hurt your credit score, but it's also powerless to help you build or fix your credit as well.
Other things to be aware of
Aside from their hidden fees and an inability to fix or build credit, there are other pitfalls to prepaid credit cards.
One of the biggest is the lack of protection in the event of a lost or stolen card. Because the money on the card is your own, your provider has little power to replace any lost funds as a result. In all likelihood, while you can always get a new card, the balance on your old card will be gone forever.
Also, while prepaid cards are currently accepted at a wide variety of businesses, some (such as bars and restaurants) won't take them as a form of payment. If you're going somewhere where you know you'll be using a prepaid card, it's good policy to call ahead and make sure your card is accepted there.
In addition, many prepaid credit cards cannot be used outside of the country they were purchased and activated in. If you're looking to use one abroad, check the fine print in your contract and make sure it doesn't have a "valid in (country name) only" clause.
Alternatives to prepaid credit cards
While prepaid cards won't help you fix or build your credit, there are some great alternatives out there that report to Canadian credit bureaus and will help you reach your goal. Let's give them a closer look.
Balance transfer credit cards
Balance transfer credit cards are perfect if your goal is to pay off previous credit card debt and get your score back into good standing. These cards typically feature an ultra-low promotional interest rate (usually around 1.99% and lasting between six and 12 months) and waived annual fee for the first year, encouraging those with an existing balance on another card to "transfer" it over. Providing you've got a solid plan in place to pay off what you owe within a set time frame, you can use the balance transfer card's temporarily low interest to get debt-free much faster. Just make sure you can pay everything off before the promotional period ends.
Additionally, because balance transfer cards are geared towards those trying to fix their credit, they are incredibly easy to get approved for. You may have to pay a small balance transfer fee (typically around 1% of your balance) but, if used correctly, the possible benefits far outweigh the cost.
Secured credit cards
Similar to prepaid credit cards, secured credit cards require money up front and are very easy to be approved for. The main difference is that, instead of loading your card with your own funds, you'll pay a deposit to your provider in order to activate the card and access your credit. This deposit will be held as collateral in the event of any late or missed payments, reducing the amount of risk on their end. Because of this, these cards are typically marketed to those with bad or no credit, making them easy to acquire.
Student credit cards
Student credit cards are (you guessed it) primarily marketed to students, but that doesn't mean others can't take advantage of their easy approval process and low annual fees.
Because student credit cards are designed for those who are new to credit, applicants aren't expected to have much of a credit history, if at all. In addition, many feature no annual fee, saving you a pesky bill each year.
A big benefit to getting approved for a student credit card is that many of them come with perks and rewards in addition to attractive welcome bonuses. These can range from promotional low interest rates to accelerated cash back rewards for a set time period after signup, so you can take advantage of extra savings while you work to build your credit.
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- Get 4,000 bonus points (4 free movies) with your first SCENE credit card purchase (offer ends November 21, 2021)
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- No annual fee
- 19.99% interest rate
The bottom line
Prepaid credit cards might sound like a great deal, but the drawbacks associated don't make them such a great option in light of the alternatives available. Use the links above to view our top picks for balance transfer, secured, and student credit cards, and take advantage of our eligibility checker tool to find out in less than a minute if you'll be approved for your card of choice. If you've got any other tips on fixing and building credit, share them in the comments below.