Many credit card companies are jumping on the bandwagon of offering prepaid credit cards. Prepaid credit cards are exactly what the name suggests—you prepay before you can use the card.
Prepaid credit cards are a great way for parents to control their children’s spending. This is how the prepaid credit cards work: You find a financial institution offering such a card. You fill out the proper applications and agree to the terms and conditions of the card. You set up an account with your child’s name on it as well as yours. You then deposit money into the account and anyone else for that matter. Even Grandma and Grandpa can deposit birthday money into the account. These cards are called reloadable prepaid credit cards. There are other kinds of prepaid credit cards and we’ll get to those in a moment.
Prepaid credit cards under these accounts are a fantastic way for your child to know what credit is and how it’s used. These prepaid credit cards are in no way like traditional credit cards. Money has to be in the account for the prepaid credit cards to be used. Traditional credit cards don’t require you to have any money in an account … hence the term “credit.” Traditional credit card companies will lend you money and you simply pay them back. Prepaid credit cards don’t have any lending involved. Users of the prepaid credit cards can only use the amount within the account. Once that amount is depleted, spending is delayed until more money is deposited. It’s a brilliant way of controlling your child’s spending, especially if you are the one putting money into the account.
You can also evaluate the account as often as you like. This allows you to see where, when and what your child is purchasing. If your child comes to you and says he needs more money for school supplies and clothes and you see he has wasted his money on video games, well … you know what to say.
When you sign up for prepaid credit cards you should be aware there is usually some annual fee involved. Most companies will charge an annual fee of $15. Some other companies may charge more. Find out how much the card costs when talking with a representative from your financial institution.
There are a couple of other kinds of prepaid credit cards. One is called the disposable prepaid credit card. This card is more like the kind of gift card many retailers offer. Big credit card names like American Express, Mastercard and Visa are offering these disposable prepaid credit cards. You can find out more about these types of prepaid credit cards through your bank, credit union or visiting a number of Internet sites. A certain amount of money is deposited onto the card. For example, someone may wish to give one of these prepaid credit cards as a one-time gift. This person can deposit $50 on the card. The person receiving the card can spend the money at any location that accepts American Express, Mastercard or Visa. Once the money is gone—it’s gone! That’s how these prepaid credit cards work.
The other kind of prepaid credit card is a bank purchased card. This card is like the disposable one above, except you purchase the card at a bank. The card can be used at any store with a credit card terminal. Once the amount on the card is used, you simply throw it away.