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Types of Credit Cards: Prepaid Cards

A prepaid card looks like a regular credit card, and in many ways, works as one. Instead of borrowing against a line of credit, you load money onto prepaid cards so that you can make purchases at a merchant point-of-sale, such as a retail store or online shop. Reloadable prepaid cards do not require a bank account to use and can have money added to them in many ways.

Prepaid Cards at a Glance

Also sometimes referred to as prepaid debit cards, prepaid cards act more like debit cards than credit cards as you can only use the available balance on the card to buy goods or services. Since they’re associated with major card networks (by way of having their logo printed on the card), prepaid cards can also be used in most places that credit cards and debit cards from those networks are accepted. You can also get paid faster by having your employer make a direct deposit onto your card instead of depositing a paper check and waiting for it to clear.

Trying to make a purchase using your prepaid card that is more than the available balance won’t result in the overdraft fees that debit cards charge, but the sale will be declined. Some prepaid cards will also allow you to make atm withdrawals as you would with debit cards, but for a fee. Make sure you read the card issuer’s terms and conditions to know what actions using your prepaid card will result in fees.

Credit Required

The process of getting a prepaid card is simple, as there are usually no credit checks involved to buy the card or load it up with funds. In fact, you can even use prepaid cards if you have a bad credit history. If you’re trying to make a purchase somewhere that cash isn’t accepted and do not have the credit score to qualify you for a cash back rewards credit card, for example, a prepaid card may be your best option.

Fees

It is more important than ever to manage your money when using a prepaid card if you want to avoid paying a lot of fees. You may be charged fees for setting up your card, fees for reloading it with money, atm withdrawal fees, monthly fees, foreign transaction fees, and even fees for entering your card number online and using it to pay bills automatically.

What to Look for in a Prepaid Card

A prepaid card offers much of the freedom and security that comes with using credit cards, even if your past credit history is otherwise holding you back. Keep these tips in mind when selecting a prepaid card to add to your wallet.

Functional Features: Because every prepaid card works differently, knowing what your card can and cannot do is critical when choosing which one to go with. For instance, some prepaid cards cannot be used to set up recurring online bill payments while others limit the number of ATM transactions you can make. Read the terms and conditions of the card before ever loading it with funds to be sure it will work as you’d like it to.

Easy Reloading Options: Being able to conveniently add cash to your prepaid card is a major selling point, regardless of the issuer. Most cards allow you to transfer money from a bank account onto it, add money from an online payment processing account, have your employer directly deposit your paycheck onto it, reload it at a physical retail shop, or add funds using a separate reload card bought at a store.

Be Aware of “Hidden” Fees: When it comes to prepaid cards, “hidden” fees are likely fees that you didn’t know about because you didn’t read the terms and conditions before purchasing the card. Monthly fees and ATM fees can add up quickly if you’re caught unaware, putting you in a more difficult financial situation than the one you may already be in. Take a few minutes to read the fine print before making your decision to remain informed and aware of potential pitfalls ahead.

Online Management and Monitoring Tools: Because budgeting is so important when using a prepaid card, being able to easily track your spending is as well. Some (but not all) prepaid cards offer a companion mobile app that allows you to see exactly how much you’ve spent on the card and how much you have left, and others grant the ability to reload the card with cash right on your phone or tablet. As nearly everyone has a smartphone on them nowadays, using that tool to keep tally of your finances makes sense… and cents.

Theft Protection: Unlike cash in many situations, you may be able to recover the funds you’ve added to your prepaid card if it’s lost or stolen. Cards that offer zero liability protection make it easy to replace the card and value on it so long as it’s registered with the issuer, so look for that benefit when making your selection as well.

Why Use a Prepaid Card as a Financial Teaching Tool?

Even though prepaid credit cards do not help you build credit (because their use isn’t reported to the three credit bureaus or tied to a bank account), they can still be used to help you build responsible financial habits. Both children and adults can use prepaid cards to make sure they keep to a strict spending budget, whether for key expenses like food or more fun purchases that occasionally get out of hand.

As a parent, a prepaid card can be loaded with lunch money or used to dispense the allowance that your kids earn from chores completed around the house. Not only is it safer than having them only carry cash around, but you’d also be able to monitor their spending history using the card’s mobile app.

A prepaid card can also be used for personal budgeting reasons, such as limiting the money you spend on a hobby or trendy clothing by only using what you’ve loaded on the card each month. You may also want to avoid paying overdraft fees or interest as you would with a debit card or credit card, or you may not have a bank account at all. In any of those scenarios, a prepaid card could come in handy.

Your purchasing power may be limited if you have a poor credit score, but with a prepaid card in hand, you’ll still be able to enjoy some of the perks and experiences that come with having plastic. So long as you budget yourself and carefully read the terms and conditions, you should be able to get by until you get that unsecured card you’re after.

About: Allan

Allan is the Managing Editor at BestCards.com. In addition to leading a robust team of writers in the pursuit of thorough credit cards expertise, he is an avid fan of films, food, traveling, and Star Wars.