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.
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.
Here’s how prepaid credit cards work:
There are two types of prepaid credit cards: open-loop and closed-loop.
Let’s take a look at some of the benefits of prepaid credit cards:
There are some drawbacks to consider as well
Other than prepaid credit cards, here are a few other options to consider:
The following table shows the prominent differences between a secured credit card and a prepaid credit card:
|Basis||Secured Credit Cards||Prepaid Credit Cards|
|Perks||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.|
|Credit Rating||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.|
|Interest||Secured credit cards charge interest if they have a monthly balance limit attached to them.||No interest is charged on a prepaid credit card.|
|Additional Charges||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.
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.
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.
Ans: A low monthly maintenance fee is possible with prepaid credit cards. The funds are deducted from your card’s existing balance.
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.
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