What Is A Prepaid Credit Card And How It Works


Prepaid credit cards provide a path to get your hands on lots of standard card benefits without some of the issues faced by many Americans who are not able to qualify for a credit card. But then, what is a prepaid credit card and how does it work?

What Is A Prepaid Credit Card?

Prepaid credit cards are not the same with the regular credit cards. And that is despite the fact that they carry Mastercard logos, Visa, Discover, or that of American Express. Instead of harnessing a credit line, prepaid card holders only have access to expand what they credit on the card.

Prepaid cards look very identical to conventional credit cards, they can be made use of in areas that accept credit cards, and they also carry network emblems.


what is a prepaid credit card
What Is A Prepaid Credit Card ?

How Does Prepaid Credit Cards Work ?

They function in diverse ways like bank debit cards, with every transaction you make bringing down your cash balance, but a prepaid credit card is not tied to just one bank account. Some prepaid cards can be used to withdraw cash from an ATM machine, but only from the amount you credit in the card.

For instance, pay $300 onto your prepaid card. Once you make a rental car payment of $150, only a balance of $150 will be left for you to spend. And once your entire balance is exhausted, you will need to pay in more money to continue using the card.

There are prepaid credit cards that are reloadable. By ‘reloadable’ it means that you can add money to the card a number of times. But there are others which are not reloadable.

According to the Director with the National Endowment for Financial Education in Denver, Paul Golden, “This is not money that’s being lent to you like with a credit card,” He says, “You actually are spending your money.” 

You can hardly run into debt with these kinds of credit cards since most of the cards will not approve purchases that surpass the loaded amount. And even those that permit you to exceed your limit will very likely charge you overdraft fees even though there are now new federal rules that place limits on these fees. However, bear in mind that you can exceed your limit with a low balance and a separate card fee places you on red.

Even with a bad credit, you can still acquire this card. But has earlier stated, you will be required to pay in cash before you can use it. And since you are not allowed to carry a credit balance which you will pay later, we can’t regard it as a true credit card.

About 6.5% adults in the United States do not have a bank account, yet they make bookings, and rent cars instead of needing to deal directly with a bank. A lot of prepaid credit cards also have account numbers and a routing number which allows users to have their paychecks deposited into their prepaid card account.

Can You Build Your Credit Using A Prepaid Credit Card?

Regardless of whatever your credit history is, you can always opt for a prepaid credit card. Since you aren’t borrowing money, the issuers do not bother to check your credit history. That in turn means that prepaid credit cards will not establish or improve on your credit score.

Using these cards has no connection with either your repayment or borrowing attitudes, which makes it unnecessary for providers to report anything to credit bureaus. So, using this has no influence on your positive or negative credit score. However, you should opt for a secured credit card if you are looking out to rebuild your credit history. And just like the prepaid card, you’ll be required to make deposits which act as collateral, perhaps you do not settle your credit card balance, while your payment history is also reported to credit bureaus.


How Much Does Prepaid Credit Card Cost?

Prepaid credit cards can be accompanied with different kinds of fees. Ensure to go through the “fine print” to find out which of the options open to you comes with the lowest costs to avoid eating up your deposits in the card.

For instance, the Account Now Prepaid Visa requests $9.95 monthly fee, a $3 charge on each withdrawal on an ATM, and a fee of up to $5.95 to reload more funds into your credit cards, ACH transaction charge of $2.50 on your account, and $1.50 as a charge for inquiry of account balance at an ATM. So, whenever you are charged a fee, the deduction is made from your balance in your account, which equally leaves with reduced funds to spend.

So, since the charges you incur depends largely on the prepaid card you opt for, always ensure that you check closely at the fee schedule of the card option you choose. Many come with no monthly fee and other fees are reduced to the lowest. 


Who Should Use Prepaid Credit Cards?

Prepaid credit cards may be considered if your bank offers no debit cards and you have no conventional credit card, or you just cannot get a checking account as a result of a bad credit already built with ChexSystems. ChexSystems is involved in monitoring activity on individuals’ savings and checking accounts to create alerts to merchants over people writing bad checks in the process of sorting out purchases.

Parents are also able to cash for kids on the prepaid cards as a way to educate them on money management skills and also for their own use. With parents boosting their accounts with funds, college students can pay for food, books, and other ongoing expenses. People also use these cards to manage their budgets.


Here Are Some Options To Load More Money on A Prepaid Card?

  • You can transfer funds from a bank or other financial institutions.


  • Direct deposit can be made by your employer into your prepaid credit card.


  • You can choose a reloadable card such as MoneyPak or Vanilla.


  • You can make a cash transfer into your card from your PayPal account.


  • You can also reload the card at retail stores such as Walgreens and Walmart.


Types Of Prepaid Credit Cards

There are two key ways prepaid credit cards are categorized into. These are open loop and closed loop. 

Open Loop

You’ll find this type of credit card with network logo brands such as Mastercard, Visa, Discover, or American Express. These cards can work nicely anywhere the brand is accepted. Some employers provide reloadable open-loop cards to provide pay and benefits to workers more conveniently.

Benefits such as unemployment insurance can be paid by Government agencies using open-loop.

Closed Loop

These types are only restricted to certain areas which includes groups of stores and certain stores.


What To Do To Opt For The Right Prepaid Credit Card

As earlier stated, it is very important that you go through the agreement that is accompanied by your prepaid credit card to ensure that you comprehend the fees and card limits.

Mike Sullivan, personal finance consultant with Phoenix-based Take Charge America, a non-profit credit counseling and debt management agency cautions prospective applicants, “Prepaid cards are not created equal. Buyers must be careful when selecting a card.”

The CFPB demands that those issuing prepaid cards should offer a disclosure form that states the fees very clearly. More importantly, the company’s website should evidently state the fees schedules and website of the CFPB.

Paul Golden, director with the National Endowment for Financial Education in Denver says “Some fees are especially worth avoiding.” 

He specifically mentions that monthly service charges and withdrawal fees can be outstandingly bad and shocking. Golden adds, “It’s up to the consumer to really understand where all the fees are assessed and if you’re able to avoid those fees, and if not, then that’s probably not the right product for you.”

The cash that is being attached to some of the prepaid credit cards are Federal Deposit Insurance Corp. insured. But then, not all the prepaid cards are being insured by the organisation. So some may come with requirements that include registering the card. it is necessary that you inquire of the issuer before making a purchase of the card if you find the coverage important.

In addition, while some cards can be issued outside the United States, some others can’t, or there may be foreign transaction fees charged when you make use of the card in a different country.

What is a prepaid credit card? What is their function, types, and the best decisions to make when considering one? The information in this article will help you make the best choices when opting for a prepaid credit card.


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