Prepaid Credit Cards

The term prepaid credit card is misleading; it is not really a credit card at all. Credit cards extend credit to borrowers with the assumption that the charges placed on the card will be paid back in a timely manner and with additional interest charges.

A prepaid credit card can be used like a credit card, but it does not involve the extension of credit to a borrower. You must pay for a prepaid credit card before it has any value. The dollar amount placed on the card equals the spending limit. Once the money has been used, the card cannot be used further until you put more money into the card’s account.

Prepaid credit cards are more akin to store gift cards than actual credit cards. They don’t require the extension of credit, they have a set amount, and there is no danger of going over the spending limit.

How do I get a prepaid credit card?

Prepaid credit cards do not require a credit check like regular credit cards. Your financial history will have no bearing on qualifying for the prepaid credit card because there is no approval process. Most of the major credit card companies offer a prepaid credit card.

To get a prepaid credit card you must have an upfront amount of money to place on the card. You can get a one through an online supplier by paying with a debit card, regular credit card, or PayPal account. Prepaid credit cards can also be purchased at store locations with cash.

Where can I use a prepaid credit card?

Because prepaid credit cards are offered by credit card companies, they have the credit card’s logo on the card. That means that you can generally use the prepaid credit card anywhere that a regular credit card from that company is accepted. For instance, if your prepaid credit card is backed by Visa, then your prepaid credit card can be used anywhere that Visa credit cards are accepted.

Each card will have its own restrictions for use; some cannot be used at pay-at-the-pump machines because the machine cannot create an upfront dollar amount to charge to the card. This glitch is dealt with by going inside the gas station to pay for gas through the cashier.

What are the advantages of a prepaid credit card?

Prepaid credit cards have many advantages and are are a financial option that has little risk. The advantages of prepaid credit cards include the ability to set your own limit, avoid late fees and penalties associated with credit cards, typically do not require a credit check or hurt your credit score.

What are the disadvantages of prepaid credit cards?

No form of money is perfect, and prepaid credit cards have their downsides as well. Prepaid credit cards do not improve your credit score and some have pretty large fees. While the fees for prepaid credit cards have decreased since the Credit Card Accountability Responsibility and Disclosure Act of 2009, most prepaid credit cards will expire after five years or will impose inactivity fees after 12 months of nonuse.

Prepaid credit cards also cannot be used for more than the balance on the card in the event of an emergency nor typically offer rewards such as airline miles or cash back like some regular credit cards or provide the same protections as regular credit cards such as resolving disputes with merchants or providing warranty protection on certain purchases.

Who would benefit from a prepaid credit card?

There are many instances when a prepaid credit card is a better option than a regular credit card, cash, or even a debit card. The low risk associated with prepaid credit cards makes them excellent options for:

College students. Parents can give a child at college a way to pay for necessities without worrying about large, unnecessary charges on a credit card or an overdraft charge with a debit card. College students are also not going to damage their credit scores with a prepaid credit card.

Online purchases. Consumers don’t have to worry about their credit card or banking information being stolen.

Gifts. The recipient can use the gift just about anywhere and for anything.

Prizes, rewards, and bonuses at the workplace. Many businesses use prepaid credit cards to reward employees financially.

Prepaid credit cards can be useful when other credit options may not be available. Before purchasing these cards, be aware of the potential pros and cons and most importantly, the issuer’s terms and conditions.