As its name suggests, a prepaid credit card is a card that you "pre-load" with money before using. Rather than being linked to a bank account like a debit card or providing a line of credit like an unsecured credit card, a prepaid card's spending limit is set by the amount of money that is loaded or deposited onto the card.
There are pros and cons to using a pre-loaded card. Only you can decide if the benefits outweigh the negatives for your needs. The following information will help you decide.
Prepaid cards look and feel like standard credit cards and have the same features, including a card number, expiry date, and security code. Not only are prepaid cards widely accepted and convenient, they can also help you keep your spending under control.
If you have a poor financial record, you may have difficulty opening a checking account or being approved for a credit card. Using a prepaid credit card could be an alternative to carrying cash around with you everywhere.
A prepaid card typically has a VISA, MasterCard, or American Express symbol on it and can be used to make retail purchases. Some prepaid cards even allow you to take money out at ATMs and offer larger networks of free ATMs than many banks.
One downside of prepaid cards is that they do not offer the same legal protections as credit and debit cards. For example, if someone steals your prepaid card and makes fraudulent purchases with it, you may not get your money back.
Additionally, prepaid cards might not have the same FDIC insurance that bank accounts provide in the event of a bank’s failure.
How Prepaid Cards Work
Once you have used the entire balance on a prepaid card, you have to load more money onto it in order to be able to use it again. Prepaid cards can typically be loaded with money as needed online or at major retail stores like CVS and Walmart. In an area where there are few bank branches, having a prepaid card may be more convenient than having a debit card.
Prepaid cards are an ideal choice for those who are often charged overdraft fees for overdrawing their checking accounts. However, using a prepaid card cannot help you improve your credit score or build your credit because it is not a reflection of your borrowing or repaying habits. If your goal is to build your credit, than getting a secured credit card is a better solution.
Watch Out for Fees
Managing a prepaid credit card is a lot like managing a checking account or savings account because you don’t have to worry about interest, finance charges, due dates, or late fees. However, some prepaid cards do come with fees, such as the following:
Each time you are charged a fee, it is taken out of your balance, leaving you with less money to spend. Not all prepaid cards have steep fees, however. You need to compare your options and see which cards offer the lowest fees.
Depending on the prepaid credit card you get and the way that you use it, it might be less expensive than having a checking account. You can avoid many of the fees incurred with a prepaid card if you’re careful.
For example, you could use direct deposit to reload your card to avoid reloading fees charged at retail stores, or request cash back at retail stores instead of paying a fee to withdraw cash at an ATM.
Prepaid cards offer the speed and convenience of credit cards and debit cards, but they are easier to get and can help you stick to your budget.
Consider using a prepaid card if you’re having trouble getting a bank account, you want to avoid going into debt, or you simply want to take control of your spending.