Pre-paid credit cards will do nothing for your credit history

Dealing as often as I do with credit-challenged clients, I am often asked about pre-paid credit cards. They do have their place, but there is absolutely no impact (good or bad) on your credit history. They seem suited to people who simply need a credit card for certain transactions (parking lots, internet purchases etc.) but who cannot qualify for a regular card. They can also be useful for gifts or for beginning the teaching process for young people under the age of 18.

I came across a very good article at Moneyville this week which was entitled “A primer on pre-paid cards.” With thanks to the original author, Jennifer Stewart, here it is below.

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A primer on pre-paid credit cards

November 04, 2010
Jennifer Stewart

With the Christmas season nearly upon us, many gift buyers are opting to forego overcrowded shopping malls and long lines, and are purchasing pre-paid credit cards instead.

“If you don’t feel like trying to beat the Christmas rush or giving somebody money, which can often seem impersonal, then pre-paid credit cards can be a great gift option,” said Leanne Di Pucchio, who has given and received a pre-paid credit card during the holidays. “It can also take the cringe out of returning a gift you’re never going to use.”

While a pre-paid credit card may give users endless shopping choices, the unique form of swipe-and-go-plastic comes with its own rules.

Not quite a gift card, debit or credit card, pre-paid credit cards allow consumers to load a pre-determined amount of money onto a card, which is then used at stores. It is impossible to go into debt using a pre-paid credit card because once the money is gone, the card doesn’t work until more is deposited. There are no bills and no interest charges.

“It is essentially the same as a debit card linked to a bank account, without the overdraft option,” said Margot Bourque, a financial security adviser with Maia & Associates.

Touted as an alternative to carrying cash and an effective budgeting tool, pre-paid credit cards have one major difference from regular credit cards: they don’t build credit. All money on the card is pre-paid, and therefore developing credit history is impossible.

“Your credit rating is the most important thing you can ever have. Financially speaking, it’s like gold,” said Bourque, who added that that getting mortgages and best rates are highly dependent on credit history. “If you can get credit, even the slightest amount, pre-paid credit cards are the card of last resort.”

Despite their disadvantages, pre-paid credit cards are heavily advertised during the holiday season to give your loved ones what they really want: the freedom to make their own purchases. During other times of the year, they are touted to parents as a budgeting tool, allowing parents to control how much their child spends and making it impossible to go into overdraft or unwanted debt. The cards also give parents a means of getting money to their child in a pinch.

Mark Shefner, 24, received a pre-paid credit card this year as a promotion from an eye-wear company pre-loaded with $100. The card, said Shefner, was useful — until he got to the last $10.

“Once the bulk of the money on the card was gone, I basically stopped using the card, except for parking now and then,” said Shefner. “It’s not something I would recommend to others. I would always use my credit card, or use cash.”

Contrary to common belief, some pre-paid credit cards come with protection, in the case of a lost or stolen card. All MasterCard prepaid cards carry the same security protection as other MasterCard payment cards including Zero Liability, which protects cardholders from unauthorized purchases. Visa pre-paid cards are also protected through Visa’s Zero Liability policy providing users to follow set-out rules, such as registering the card. Rules for pre-paid Visa cards vary per issuer.

In the rush of the Christmas season, a pre-paid card can allow users to take advantage of post-holiday shopping sales, and avoid long waits in return lines. But buyer beware the swipe and go plastic is not what it appears.

“I think as long as people know that pre-paid credit cards are essentially gift cards then they are fine,” said Di Pucchio. “I think the term pre-paid credit card is misleading and may confuse some people come Christmas morning.”

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