Pros and cons of prepaid credit cards

When trying to stay on budget, living a cash-only lifestyle is the best plan. But in today’s digital marketplace, is that viable?

prepaid credit cards

“Prepaid credit cards can offer a decent alternative to traditional buy-now, pay later credit cards, but like with all aspects of your finances you need to be well-informed about how they work. This is to protect yourself and to make sure that you’ve got the right financial tool to help you reach your goals,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.

Let’s examine some of the pros and cons of prepaid credit cards.

Super spender?

If you have an issue with spending beyond your means, a prepaid credit card can help you stay in control, while still getting many of the flexibility and convenient perks of credit card use. Many people find prepaid credit cards to be a useful budgeting tool as well, because they can track their spending as well.

Cash-like experience

If would prefer to have a cash-only lifestyle, but don’t like the idea of carrying around wads of cash, then a pre-paid credit card is a good option. You still use the same “when it’s gone, it’s gone” mentality, but don’t need to fret about your bankroll.

Another pro for pre-paid credit cards is that in many cases they are safer to use. You are far less vulnerable to fraud, especially for online transactions. You also don’t have the headache of having to cancel your cards as you would if your personal information was compromised with traditional cards.

Good for travelling

Many travellers appreciate the convenience of prepaid credit cards. Some prepaid cards are geared for travellers in particular and have favourable exchange rate policies.

A teaching tool

Parents like prepaid credit cards to give to their teens and young adult children. It can be a great way to teach them about responsible money management in a mock-credit environment, without the danger of running up expenses; instead of accumulating expenses for a bill, you detract from the balance.

The fees

And on the downside of prepaid credit cards? There are fees, which can be substantial. For instance, many cards charge activation fees, maintenance fees, transaction fees or inactivity fees.

Some cards have an expiry date on them as well. These are all good reminders to read the fine print in full before you take out a prepaid card.

You don’t get the benefits of a credit history

“If you are seeking a credit card with a goal of establishing (or re-establishing) a good credit history, a prepaid credit card won’t accomplish that goal. The only way to establish good credit is to take out traditional debt and make the payments on time every month,” says Schwartz.

If you’ve had issues getting approved for credit, explore the options of taking out a secured card or bringing a co-signer on board with you.

If they are lost, you are on your own

Unlike with traditional credit cards, the balance isn’t covered if it is lost or stolen. You’ll effectively lose whatever balance you’ve got remaining on the card.

Not as good as savings

If you tend to leave a larger balance on a prepaid credit card, it isn’t accruing any interest, which it would be if it were cash sitting in your savings account. Don’t use them as a savings tool, but rather as a spending tool.

Trying to rebuild your credit? What’s your strategy? Call one of our trained credit counsellors at 1-888-294-3130 or visit our online debt analysis.

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