Also known as a secured credit card, a prepaid credit card is usually used to increase a low credit score or to help introduce teens to spending. These credit cards are issued by the major credit card companies—VISA and MasterCard—but they are not typical credit cards. Prepaid credit cards are secured by a deposit paid when the account is opened. The user’s credit limit is restricted by the amount of the deposit.

These cards are often confused with prepaid debit cards. However, prepaid credit cards have features that their debit counterparts do not.

--             Issuers report the cardholder’s monthly payment habits to the major credit bureaus. This feature makes prepaid credit cards a common recommendation to those needing to perk up a poor credit score.

--             Because the spending limit is restricted by the deposit, going over the limit is impossible.

--             Prepaid cards can be used in much the same way as an unsecured card. The only difference is that purchases are declined if the amount is over the spending limit."

Although prepaid credit cards have advantages for the user who cannot qualify for an unsecured card, many predatory companies have designed ways to make this option riddled with fees and other pitfalls. Companies have been known to limit spending to only a fraction of the deposit. When cardholders try to increase their limit with a higher deposit, the bulk of that new deposit is placed in savings, rendering it untouchable, while the credit limit may have barely increased.

Another underhanded tactic used is attaching fees. Some companies do so in the form of “insurance” deducted from the card balance on a monthly basis. Others charge high interest rates on purchases or exorbitant annual fees.

To avoid such tactics, research the available prepaid credit cards well before applying. For more information, visit Bankrate’s guide to common facts about prepaid (or secured) credit cards at 10 Questions Before Getting A Secured Credit Card.