What are Prepaid Credit Cards?
Another name for a prepaid credit card is a payment card. This is not a popular term but is very descriptive of the most popular use of prepaid credit cards.
Prepaid credit cards are preloaded with funds and used like a normal credit card. They are the opposite of a credit card because when you use a credit card you are borrowing money through credit, when you use a prepaid credit card you are using the money that you have added to the card. When you run out of funds the card has to be loaded again in order to continue using it.
Do They Build Credit?
Prepaid credit cards are debit based just like a bank debit card. They do not offer access to any credit and because they are not credit based or have any credit function they do not affect your credit score. In other words they will not help you build your credit and they will not adversely affect your credit.
Here are a few things to know about prepaid credit cards:
1. Prepaid cards are an alternative to banks.
It may look and act like a credit card but there is no credit involved. The money on your prepaid credit card is a result of a prepayment. If there is no money on the card, the card will not work. Think of it, no more expensive overdraft fees!
For the many people in the USA who prefer not to deal with banks these cards allow you to have all of the convenience of a credit card without the relationship to a bank or bank account. More importantly reloadable prepaid credit cards have their own routing numbers and account numbers making them ideal for the direct deposit of your paycheck. They are an excellent alternative to traditional banks.
2. Prepaid cards are available to those with poor or no credit
Credit is not in question when you purchase a prepaid credit card. There are no credit checks, no embarrassing questions. You can’t spend beyond the amount loaded onto the card making them an ideal first card for teens. Because you can only spend what is on the card you will not make the kind of overspending mistakes so commonly available with credit cards that can harm your credit and your budget for a long time.
3. Expect to be hit with fees
The benefits of a prepaid credit card may sound too good to be true however these benefits come at a price. Since the card issuer cannot make money on the interest you pay when using a prepaid credit card, after all you are not borrowing any money, you are using your own money. The card issuer will charge fees for a variety of things including but not limited to:
- Buying the prepaid credit card or as they call it a ‘set-up’ fee
- Adding money to the card fee
- Cash withdrawal fee
- Monthly maintenance fee
The fees can add up, make sure you read the fine print or do your research on the internet. There are cards that will waive fees if you keep a certain balance or have direct deposit, cards fees can vary in the types of fees and the amount of the fees. All cards are not created equal; there are a large variety of cards available. Find the one that suits you best.
4. Prepaid Cards Can Help You Manage Money
Even with the fees charged by the card issuer if you are not interested in a bank account the fees on a prepaid credit card can be much cheaper than other fees charged for services. Consider the fees you would pay for money orders and check cashing services they can add up fast. Even if you have a bank account you may want to consider a prepaid debit card for a specific purpose such as giving money to a family member or loading a budget item on the card such as your grocery money.
Register your card! Prepaid cards offer some of the same theft and loss protections as a credit card if you register the card. If you report the loss or theft of a registered card to the issuer most will issue you a new card and restore your balance. They are also insured by the FDIC, just like the banks up to $250,000.