What is a Prepaid Credit Card and How Does it Work?

If you need a credit card but are not eligible for it due to a low credit score, a prepaid credit card could be an option for you. Prepaid credit cards have many benefitsand can be an excellent substitute for cash and traditional credit cards. Read on to know everything about prepaid credit cards.

What is a Prepaid Credit Card?

A prepaid credit card comes loaded with a predetermined amount of money that you can use for . When you make a purchase, the amount gets deducted from your card balance, just like a debit card. Here, you are not ‘borrowing’ money from the card issuer, as it is the case with secured or regular credit cards. In other words, a prepaid credit card is similar to a debit card and it does not affect your credit score. 

How Does a Prepaid Credit Card Work?

Here’s how prepaid credit cards work:

• Prepaid credit cards function similarly to debit cards, except that instead of drawing funds from your bank account, they use the money you have previously loaded onto the card. 
• Because the cards are reloadable, you can add more money to your top-up credit card in the future. In addition, credit card companies such as Visa, American Express, and MasterCard also support the cards and provide many of the same protections. 
• Anyone can obtain a prepaid card; no credit check is ever required.

Also Read: What Is A Business Credit Card And How To Apply Online?

Types of Prepaid Credit Cards

There are two types of prepaid credit cards: open-loop and closed-loop.

1. Open-Loop: An open-loop prepaid credit card can be used anywhere that accepts the card’s credit card network. For example, if your open-loop prepaid credit card bears the Visa logo, it will be accepted at any merchant, location, or ATM that accepts Visa cards.
2. Closed-Loop: A closed-loop prepaid credit card, also known as a single-purpose card, can only be used to make purchases from a single retailer or group of retailers. For example, you may be able to use the card only at a specific grocery store chain. Closed-loop types of prepaid credit cards typically lack a credit card network logo.

Benefits of a Prepaid Credit Card

Let’s take a look at some of the benefits of prepaid credit cards:

• Doesn’t Necessitate a Credit Check: To avail of a prepaid credit card, no credit check is required. As a result, it is an excellent option for people with low credit scores or poor credit history.
• Offers a Secure Alternative to Cash: A prepaid credit card is a safe and convenient alternative to cash.
• Does not Require a Bank Account: A bank account is not required to obtain or use a prepaid debit card. Prepaid credit cards, unlike debit cards, do not require you to draw funds from a bank account; however, if you have one, you can deposit funds from your checking or savings account.
• You will not Go into Debt: You won’t have to worry about carrying a balance on your credit card because you’re using funds that have already been loaded onto the card.

Drawbacks of a Prepaid Credit Card

There are some drawbacks to consider as well

• High Fees: Fees are probably the most significant disadvantage of a prepaid credit card. Many prepaid credit cards have fees that can include the following:

• Activation charges
• Monthly maintenance charges
• Reloading or card replacement fees
• Purchase fees
• ATM transaction or balance fees
• Check deposit fees
• Transaction decline fees
• Inactivity fees
• Foreign transaction fees
• Customer service inquiry fees

• Doesn’t Improve your Credit Score: Your activity is not reported to credit bureaus because prepaid credit cards are not a form of credit. As a result, they are not an excellent way to build your credit.
• Provides Fewer Fraud and Liability Safeguards: While prepaid credit cards may include some fraud and liability protections, they rarely include the full suite of protections found in standard credit cards.

Prepaid Credit Card Alternatives

Other than prepaid credit cards, here are a few other options to consider:

• Gift Certificates: A gift card, like a prepaid credit card, does not require a bank account to obtain, but using one will not help you improve your credit.
• Debit Cards: Debit cards, however, typically require a bank account. You can only use the funds in the account linked to the card, just like a prepaid card.
• Secured Credit Cards: If you have a low credit score or a thin credit profile, one of the various types of credit cards available can help you improve your credit.

Differences Between a Secured Credit Card and a Prepaid Credit Card

The following table shows the prominent differences between a secured credit card and a prepaid credit card:

Also Read: Credit Cards: Types, Features, Benefits And Fees Explained

Final Word

If you are just starting to build your credit and are concerned that you will not be approved for an unsecured credit card, a prepaid card is a great option. Prepaid business credit cards allow you to use plastic money even if you don’t have a formal credit history because they don’t require a credit check. Prepaid credit cards are a popular option for college students and other young adults who want to establish good financial habits without taking on the financial responsibility that most unsecured credit cards entail.

FAQs on Prepaid Credit Card