Upgrading From a Prepaid Debit Card to a Credit Card

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The Suze Orman prepaid debit card was discontinued last week, effective July 1, 2014. Consumers that fell for the sales’ pitch and bought one of the cards are likely now in need of replacement plastic. This is a great time for you to consider re-joining the mainstream world of credit cards and begin enjoying the considerable benefits that credit offers over prepaid debit. Here’s why you should consider upgrading from a prepaid debit card to a credit card…

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They’re Cheaper

There are many reasons a traditional credit card is better than a prepaid debit card. First off, they’re cheaper. Don’t let anyone convince you that credit cards are expensive. There are hundreds of credit card offerings that have no annual fee and the only way you’d ever incur anything similar to a fee would be if you chose to use the card in such a way that you couldn’t pay it in full each month. Then, of course, you’d have to pay interest. Paying interest would be your choice, not the bank’s choice.

The list of fees associated with most prepaid debit cards are long and complicated. With most offerings you’ll pay flat monthly fees and then fees associated with your personal usage patterns of the card. You’ll pay a fee to activate the card, load the card with funds, use the card at an ATM, replace a lost card, place a call to customer service, pay bills online, and the list goes on and on. You don’t pay fees for any of these things with most credit cards.

With a couple of exceptions, you’re likely paying some sort of fee or combination of fees on your prepaid debit card. Don’t get me wrong as I’m not adverse to fees, but only if I’m actually getting some tangible benefit from paying them. Paying a fee to use your own after-tax money makes no sense to me especially when traditional debit cards tied to checking accounts don’t have any fees.

Your Credit Reports Cards and Scores Will Thank You

For those of you who care about your credit reports and credit scores, your use of a prepaid debit card is like a tree falling in the woods—nobody cares and nobody is listening. Prepaid debit card usage is not reported to the credit reporting agencies and does nothing, at all, to help you build or maintain solid credit reports and credit scores. Credit card usage, on the other hand, is reported to the credit bureaus and responsible use of the account will help your credit reports and scores.

Capacity, Capacity, Capacity

For those of you who don’t know what capacity means as it pertains to credit and prepaid debit cards, it means spending power. Your prepaid debit card is only as useful as the funds that are already loaded. That means unless you’re using the card for local and modest spending activity, you’re going to have usability problems.

You won’t run into the spending limit issue with credit cards as most credit cards have thousands of dollars of capacity. This will allow you to reserve hotel rooms, rent cars, make large purchases and function much more efficiently without having to worry about how much more money you have at your disposal.

The counterargument is that the limited capacity of a prepaid debit card will limit your spending and keep you out of credit card debt.  That’s absolutely true, but it’s still not a reason to be scared of using a credit card.  Prepaid debit card providers suggest that the budgetary controls of their products are a reason to use them but the value trade off simply isn’t there.

Fraud Proof

Finally, if someone steals your credit card and uses it fraudulently you won’t have to come out of pocket by even one dollar. The Fair Credit Billing Act (“FCBA”) caps your liability on credit card fraud to no more than $50. All four of the credit card networks offer zero fraud liability policies on top of the FCBA protections. Prepaid debit cards do not have the same fraud protections.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

John Ulzheimer
John Ulzheimer, Credit Expert for Credit Sesame, is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is twice FCRA certified by the credit industry’s trade association and has been an expert witness in over 170 credit related cases to date. Since 2004 John has been interviewed and published over 3,000 times on the topics of personal finance and consumer credit.

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