For those with poor credit or no credit, a prepaid card is often recommended as a way to build a credit history and learn to manage funds responsibly. This type of credit card is secured, does not require a credit check, and does have fees associated with it. While prepaid cards may not be the ideal choice for those who are able to get approved for unsecured lines of credit, they offer a way for many to regain solid credit.
A holder of a prepaid credit card first has to open a savings account with the issuing bank. This account is then funded by the card holder as used to “secure” the credit card. While the bank can set general credit line limitations, the credit card holder can determine
the size of their own line of credit. It is simply based on the amount of money that they deposit into their savings account.
Because the card holder funds the account, there is no credit check required. This type of account is advantageous to those who have no way to get an unsecured line of credit. once they have had this type of credit card for awhile and have demonstrated their ability to make payments on time and manage their funds responsibly, they can then re-apply for an unsecured card. Since the actions of the account holder are reported to the credit bureaus, positive actions on the part of the card holder can cause their credit score to improve.
Banks who offer prepaid credit cards usually impose fees for opening up this type of account. Additionally, there can be annual fees as well. Lastly, should the card holder fail to make payments on time, they can incur more fees and their card privileges can be revoked.