Prepaid credit cards may offer a chance to have a credit card without the hassle of a bank

If you have little or no credit, or are trying to establish credit, it can seem to be an insurmountable hurdle to obtain credit.  It’s a paradoxical situation - you need to have credit in order to get credit. One solution that works for many people is the idea of a secured credit card. With a secured credit card, you establish a bank account with the card’s provider and put up a cash deposit that will function as collateral against your spending limit. Your limit will not exceed the amount of your balance, so the lender isn’t risking much. If you fail to pay your bills, the lender has your cash on hand to pay them.

Still, there are some drawbacks to the secured credit card. Interest rates are higher than for unsecured cards and there may be sizable annual fees associated with their use. The biggest drawback for many people may simply be the need to have a bank account. For those who do not have or want a bank account, what can you do if you need or want a credit card?

The answer may be in the form of a prepaid credit card. A prepaid credit card doesn’t really involve “credit”, so the name is a bit misleading. It’s really a debit card that deducts your purchases from an account that you have established with the card’s issuing company. You sign up, provide a cash deposit, and your card is “loaded” with an amount equal to the amount of your deposit. You are then free to use the card as you wish, subject to the limit imposed by the amount of your deposit.

While you are effectively paying your card’s bills in advance, the card appears to be a normal Visa or Mastercard, and no one will know the difference when you pull it out of your purse or wallet. Many companies offer prepaid credit cards, and you should research them carefully and read the terms of their agreement carefully. One such firm will provide a card that will submit a record of your transactions to the major credit bureaus, but not all of them will. This is an important feature if you are young and are trying to establish credit for the first time.

Fees for these cards can vary widely and can be substantial. One company that we investigated had upfront costs of $197 - processing fees, application fees and a monthly fee to use the card of $3.95. This company also offered to report use to the credit bureaus, which is important for establishing credit, but they will add an additional $19.95 per month for the service. We think you can do better by doing a bit of research.

A prepaid credit card is not the best way to establish credit, but if you have no bank account, it may be your best solution.

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