Prepaid credit cards for college students - Advantages and Disadvantages

Prepaid Credit Cards Can Be a Safe Option for the College Bound

By Sharon Secor

Direct Lending Solutions Staff Writer

Sending your teenager off to college can be stressful in a variety of ways. One issue that is often high on the list of worries is the ability of college bound teens to handle their own affairs responsibly. Many parents struggle with the question of whether it is wise to provide their student with a credit card. While a credit card can give the student a safety net for the unexpected, a student who has not yet developed fiscal responsibility can run up a lot of debt very quickly. A prepaid credit card can be a great solution to this dilemma.

Prepaid Credit Cards Can Protect Both Students and Parents

Credit cards can provide a great deal of security to the student away at college, giving quick access to funds in an emergency. For this reason, many parents supply their college bound students a credit card to handle unexpected expenses. However, many of these parents soon regret that choice, finding that the student is not yet mature enough to use credit cards with the necessary restraint and is running up high balances with irresponsible spending practices.

If the account is in the parent’s name, this sort of irresponsible spending can become quite a burden, especially when heaped on top of tuition fees and school related expenses. For the student that holds a credit card account of their own, the debt can pile up quickly, causing a poor credit rating as they struggle to pay the credit card bills. High credit card debt can also make life difficult after graduation when the budget can already be stretched tight to make those student loan payments.

Prepaid credit cards can be the perfect way to provide a credit card to your student, while keeping a tight rein on the spending. This type of credit card offers many of the same conveniences as the typical credit card, allowing one to make online or telephone purchases, or reserve rental vehicles and airline flights. Some business do not accept prepaid credit cards, most often those that collect recurring fees on a monthly basis, such as internet subscriptions, but for most purposes they can be used in the same way as a traditional credit card.

Prepaid Credit Cards Can Help Teach Budgeting

If your college student could use a bit more practice with money management, a prepaid credit card can be a great learning tool. A prepaid credit card can minimize the consequences of money management mistakes, allowing the student to experience credit card use without the expense of interest and penalties with each misstep.

The strict spending limit can teach the importance of adhering to a budget, as your student will quickly learn the folly of spending up to the limit too quickly, leaving no funds in the account for the following week’s expenses.

How Prepaid Credit Cards Work

A prepaid credit account is opened by the deposit of funds into an account. The amount deposited becomes the credit limit of the card issued to that account, rather like a debit card attached to a checking account. No interest is charged for purchases made with prepaid credit cards and the cardholder does not receive monthly bills.

Most prepaid credit card accounts charge a fee to open the account and each time you deposit new funds. However, many prepaid credit cards carry fees that are minimal when compared to the costs associated with a regular credit card that has been used irresponsibly.

Prepaid credit cards can offer valuable protection against the misuse of credit cards by the college student inexperienced in money management. High credit card debt, run up during the college years, can affect students and their families far into the future, damaging credit reports and placing undue strain on the budget. While there are some limits in use and fees involved with prepaid credit accounts, over the long run they can be of great benefit in avoiding high interest rates and steep balances as your student strives to master financial responsibility.

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