This is a guest post from MoneySupermarket.
Popular media might make you believe that you need credit for buying goods and services. The truth is that millions of Americans live comfortably without credit.
Using a credit card increases your risk of going into debt, which occurs when you spend beyond your means. A card gives you access to hundreds or thousands of dollars. When you make less than you spend, you increase your overall debt.
Prepaid credit cards give you access to a line of credit, while restricting the amount of money you spend. The card looks like a traditional credit card, but without the high line of credit and, just like with a standard card, you can compare prepaid credit cards to ensure you find the right one for your needs.
The card contains your name and has a strip on the back for signing, giving it the look of a traditional credit card. The difference between the two cards is in the dollar amount attached to it.
When you open a line of credit, a company looks at your past history of buying and paying back loans. It uses that information to determine how much credit you get. If you have a poor credit history or no credit history, you get a smaller line of credit.
A prepaid card works differently by creating your money line based on your needs. You send the company money, which adds that amount to your card. You can only spend as much as you have available on the card.
For example, if you add $200 to your card and you already had $150 on the card, then you have access to $350 total. If you make a purchase larger than that amount, the card is declined.
Unlike traditional credit cards, you do not build credit when you use a prepaid version. Prepaid companies do not report your information to a credit bureau.
Any store or company that accepts debit or credit cards will accept a prepaid card. The cards typically have a MasterCard or Visa logo on the front. Use the cards for home improvement projects, car repairs, or even groceries.
The prepaid cards are similar to your debit card because the spending limit attaches to a monetary amount. Your bank account reports information to the credit bureaus if you have an overdraft or open multiple accounts.
Keeping your bank account in good standing increases your credit score. Using a prepaid card does nothing for your credit score because it is not a traditional line of credit.
Before applying for any prepaid card, read the instructions provided by the company. All companies now require a name, address and social security number attached to your account.
The idea comes from the government, which hopes to fight terrorism by keeping track of individuals. Once you open an account, the company sends a card in your name to the address on file.
Certain prepaid credit cards do report to credit agencies, but these are often attached to your bank account. If you do not want to build credit history, look at different offers outside your financial institution.
Providers of prepaid cards, such as Net Spend and Green Dot let you add cash quickly. Visit any approved location and upload the funds on your card for instant access.
Every time you add money to your card, the provider charges a small amount. The company deducts that money from the total you add, or adds the cost to the total amount.
Note from Little House: I like using prepaid debit/visa cards for traveling. There’s no worry about identity theft and you can load them with as much or as little as you’d like. Prepaid cards might also be a great strategy for limiting how much you’re spending in one expense category, like eating out or entertainment. If you’re looking to boost your credit score, see my e-book for helpful tips.