Advantages of Prepaid Credit Cards for Bad Credit

In today’s economy, there are more people than ever before with bad or negligent credit files. Bad credit can certainly hit you head-on like a ton of bricks.  Once your reputation as a borrower has been soiled, gaining access to the credit that you need can become a challenge and getting a credit card is next to impossible.  Fortunately, there is an alternative for folks who have a less-than-appealing credit history: the prepaid credit card.

What is a Prepaid Credit Card?

The prepaid card looks and works just like any other card with one blatant difference: your credit line is determined by or in some instances equal to the amount of money that you deposit with the bank or lender who is issuing the card.  Some prepaid credit cards will set your credit limit at the same amount of your deposit while others may match your deposit amount. For example, if you deposit $500 into your prepaid account, your available credit (if matched by the issuer) would be $1,000.  You will receive a regular bill and statement each month, and you will have the option of paying a minimum monthly payment, paying a part of the balance that has been charged, or paying the entire balance off.  After a period of time, if you have exhibited responsible borrowing behavior, the company can convert the prepaid card to a traditional card and refund any money that you have deposited.

Benefits of Prepaid Credit Cards

The most obvious benefit of having a prepaid credit card is that you have access to make instant purchases and to pay bills online or over the phone without mailing in a check, and without carrying cash with you.  But the true benefit is that this type of account can help to rebuild your credit.  Like a traditional card, the prepaid credit card reports monthly or quarterly to the major credit reporting bureaus – Experian, Equifax, and Trans Union.  By making your monthly payments on time every month, you can add valuable points to your weak credit score.

Managing Your Account

Because the prepaid credit card represents a wonderful opportunity for you to rebound your FICO credit score, managing your account wisely is important. A responsible cardholder will:

  • Make their monthly payments timely, making sure to either pay online for expediency, or to mail their payment in early, allowing at least a week via “snail mail” to reach the payment processing center and be processed.

Never exceed the available spending limit.  Exceeding the limit will cause an over-the-limit fee to be placed on the account, which triggers an exorbitant fee and can look bad on your credit report.  As a general rule of thumb, you should never even approach your available spending limit.  Charge no more than fifty percent of the available amount each month, and pay off the bulk of what you owe each month, being careful to run a thirty percent balance. On a $1,000 credit limit, you should settle up with the card company each month by still owing around $300.  By running a balance, you prove that you can manage an account, which adds more points than paying off the account in full each month.

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