What is a Prepaid Credit Card and How Does it Work?
27 September 2022
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.
There are twotypes of prepaid credit cards: open-loop and closed-loop.
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.
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:
Monthly maintenance charges
Reloading or card replacement fees
ATM transaction or balance fees
Check deposit fees
Transaction decline 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:
Secured Credit Cards
Prepaid Credit Cards
Secured credit cards come with a set of perks such as car rentals, warranties, etc.
Prepaid credit cards do not come with such perks and incentives.
Secured credit cards help you build your credit rating and improve your credit history.
Prepaid credit cards do not contribute to credit rate building in any way.
Secured credit cards charge interest if they have a monthly balance limit attached to them.
No interest is charged on a prepaid credit card.
Secured credit cards charge an annual fee as additional charges.
Prepaid credit cards also charge additional charges in the form of monthly fees.
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
Q1. How are prepaid cards different from debit cards or credit cards?
Ans: Prepaid cards, unlike debit cards, are not linked to a bank account. Prepaid credit cards, unlike credit cards, do not come with a credit line. Banks and financial institutions issue prepaid cards, but they are not linked to a line of credit or a regular checking account. Instead, you can only access the money you’ve loaded onto it. You’re not taking out a loan or making a deposit as collateral.
Q2. What should I do if I don’t have any money to put down?
Ans: Unfortunately, if you have bad credit and no money to put down on a credit card but want the spending flexibility of a credit card (i.e., the ability to buy items online and in other situations where a debit card does not work), your credit card options are limited. To be eligible for an unsecured credit card, you must have either good credit or access to funds to put down on a secured or prepaid card.
Q3. Do prepaid cards necessitate regular payments?
Ans: A low monthly maintenance fee is possible with prepaid credit cards. The funds are deducted from your card’s existing balance.
Q4. Do prepaid cards have a cost?
Prepaid cards typically have fees. This may include, among other things, an activation fee, ATM fees, reload fees, and foreign transaction fees. Check the fees involved before applying for a prepaid credit card.
Before you go…
Looking for instant 🚀 personal loans 24*7 anywhere, anytime? Get personal loans up to ₹20 lakh starting at 9.9% p.a. Install the Navi app now!
Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
We are a diverse group of writers, editors and Subject Matter Experts striving to bring the most accurate, authentic and trustworthy finance and finance-related information to our readers. Our mission is to simplify jargon and industry lingo. We believe sharing knowledge through relatable content is a powerful medium to empower, guide and shape the mindset of a billion people of this country.
Increase Credit Card Limit – How To do It and Its Benefits
The credit card limit is the maximum amount of money you can spend using your credit card. In other...Read More »
What is a Credit Card Balance Transfer – List of Cards That Offer & How To Do it?
Are you paying a heavy interest rate on your credit card? There’s a solution to pay the amount du...Read More »
What is Price Skimming and How does it work?
Price skimming is a price determination strategy whereby firms initially charge a higher price for ...Read More »
What are Virtual Debit Cards – Benefits, Usage and How to Apply?
Virtual debit cards are digital forms of physical debit cards that store all vital payment informat...Read More »
Best Credit Card Offers in India in 2023
Credit card offers are incentives offered to credit cardholders when they use the cards to make pur...Read More »
Understanding Risk-Weighted Asset (RWA) and its Calculation in Banking
Risk-weighted asset or RWA is a banking term that refers to an asset classification system to deter...Read More »
List of 10 Best Savings Accounts in India
A savings account keeps your money safe, and lets you earn interest every quarter. There are many b...Read More »
What is Credit Appraisal – Eligibility, Benefits & How It is Done?
Ever wondered why loans get approved but also sometimes get rejected? Well, every bank has its own ...Read More »
Debt Trap: Meaning & How to Avoid Falling in It
Piling up debt could bring unnecessary stress. Having multiple loan EMIs and credit card bills to c...Read More »
How to Apply for Debt Consolidation Loans and What are Its Benefits?
If you have multiple loans, taking out a single loan to pay them off is known as a debt conso...Read More »
What is a Bank Identification Number (BIN) and How Does it Help in Preventing Fraud Transactions?
A Bank Identification Number or BIN refers to a credit card's initial four to six digits. The BIN i...Read More »
What is Kiosk Banking, How Does it Work and What Does it Offer?
Banking kiosks or ATMs are available at multiple locations across India – mostly in remote and ru...Read More »
Diwali 2022: Diwali Holidays – The Festival of Lights
The ‘Festival of Lights’ is one of the biggest and most anticipated festivals in India. This is...Read More »
Best Index Funds – Top 20 Index Funds in India
Index funds replicate the performance of a stock market index, such as the Sensex or Nifty 50 to ge...Read More »