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Credit cards. Debit cards. Secured credit cards. Now another option exists to help you manage your money: prepaid credit cards. What are prepaid credit cards — and are they just as good as a regular credit card for travel expenses? As with so many finance-related questions, there is no single answer that applies to everyone. First, let’s explore exactly how a prepaid credit card works.
According to most literature, a prepaid credit card is accepted anywhere regular MasterCard and Visa credit cards are accepted — even at car rental agencies, which often don’t take debit cards. Prepaid credit cards work in the same way as prepaid cell phones — you load a specific dollar amount on to the card. You use the card until the money is gone, and then you can re-load the card with additional funds. Usually, there is an activation fee of $5 to $10 associated with the card, and there may be fees for adding more money to the card, as well.
Prepaid credit cards are great for people who:
- Have poor credit
- Prefer to use cash but occasionally need a credit card (such as for car rentals)
- Worry about losing cash and want the protection and convenience of a credit card without the interest rates
At first glance, a prepaid credit card looks a lot like a secured credit card, but there are a few major differences. Even though the money you are “borrowing against” with a secured card is your own, you’ll be subject to finance charges. You have to make timely payments. A secured credit card will help you build your credit history.
A prepaid credit card is more like a convenient way to carry cash in card form. You don’t make any payments — money you spend is automatically debited from your account and when it’s gone, you can’t use the card until you re-load it. A prepaid credit card won’t help you build your credit history or raise your credit score with on-time payments.
Thinking about using a prepaid credit card for travel? Prepaid credit cards are better than cash for many reasons.
A prepaid credit card:
- Is accepted at most places MasterCard and Visa are accepted, including car rental agencies. Call ahead to make sure you can use your prepaid credit card for a car rental. Sometimes, rental agencies require your card to have a balance that totals the rental fees plus 25% up to $300 of additional funding to cover unexpected expenses (such as damage or theft.)
- carries theft protection so you can report your card lost or stolen and recover the funds.
If you’re planning a vacation for this spring or summer and considering purchasing a prepaid credit card, other options exist. If you have poor or no credit history, you might consider a secured credit card, which will permit you to build your credit history as you charge vacation expenses and pay them off within the grace period.
If you have good-to-excellent credit, consider applying for a travel rewards card. We highlight some of the best credit cards for travel in this article. A travel rewards card will earn you cash back, flier miles and more. Many offer 0 % financing for the first six to eight months. With a top-rated card like Escape by Discover you’ll also get car rental collision coverage, travel insurance and more. An American Express card offers concierge service and travel specialists to help you book your trips, as well as travel insurance and warranty protection on top of rewards.
If you are worried about making your payments on time and not accruing debt, place money in a savings account to cover the amount of available credit on your card. Pay off your balance from that cash as soon as your bill arrives. By doing so, you’ve created your own “prepaid” credit card without paying activation fees — and you can earn cash back or flier miles in the process.
Prepaid credit cards might be the best choice for travel for some people — but not for everyone.