Understanding Prepaid Credit Cards

Prepaid credit cards are probably the most misunderstood plastic financial tools on the market. The name itself: “prepaid credit card” can be misleading. The closest a prepaid credit card comes to an actual credit card as we know it is that it is made of plastic. When you come right down to it, a prepaid credit card is more akin to a debit card than anything else – yet it isn’t actually a debit card as most people understand it. A debit card is generally linked to your checking account, or at least to your bank, while a prepaid credit card gets its value from the amount of money you load it with.


Once the prepaid credit card was born, it spawned a whole family of derivatives. To get the most value out of prepaid credit cards and to appreciate their versatility, it is helpful to examine the different kinds that are available. The first distinction we should make is between an open-loop prepaid credit card and a closed-loop prepaid credit card.

An open-loop prepaid credit card is one with a network logo on it, like VisaMasterCardAmerican Express, or Discover. An open-loop prepaid credit card can be used at any location that accepts that particular brand of credit card. On the other hand, a closed-loop prepaid credit card doesn’t have a network logo on it. It can only be used at certain locations, like a specific store or group of stores, or for a particular purpose.

So the first thing you should decide before signing on to a prepaid credit card is “how do I intend to use it? Does my prepaid credit card have to function pretty much like a standard credit card, or am I using it for some other purpose or convenience?

Another question you should ask yourself about your prepaid credit card has to do with whether or not it is reloadable. A non-reloadable prepaid credit card is one that you can’t add money to after it is issued. Here again, the purpose for which you are going to use your prepaid credit card will determine whether it should be a reloadable prepaid credit card or one which is non-reloadable.
These are the basic terms related to prepaid credit cards. There are other terms that are more cosmetic or descriptive that we will refer to later, but for a basic understanding of the differences, these will do.

Another very important factor, however, in understanding which prepaid credit card is right for you has to do with the fee structure associated with the prepaid credit card you select. There are numerous fees to consider. First, you should determine whether there is a monthly fee for your prepaid credit card and how it is applied.

Some prepaid credit cards have a monthly fee which is applied each month on a pre-selected date, even if you don’t use it. The fee is subtracted from your account balance automatically. while others are “pay-as-you-go.” In such a case, a fee is deducted from the balance of your prepaid credit card from the balance on the card each time that you make a transaction.

Some prepaid credit cards which allow you to withdraw cash at an ATM will charge you an ATM cash withdrawal fee each time you use your prepaid debit card to obtain cash. You may also be charged a second ATM cash withdrawal fee by the owner of the ATM where you use your prepaid credit card. So if you plan to use your prepaid credit card as a debit card regularly at an ATM, you should look for a card that doesn’t charge such a fee, or provides for a certain number of free ATM withdrawals per month.

As if those fees weren’t enough, some prepaid credit cards charge a one-time activation fee, often up to $10.00, a fee to reload money onto the card – up to $5.00, and even a dollar to simply check your balance, or two dollars just to talk to a customer representative. That can all add up. So between all these fees, even if you don’t use your prepaid credit card for a period of time, you could see your balance disappear without having a dollar to show for it.

People with poor or no credit are probably the greatest beneficiaries of the introduction of prepaid credit cards onto the financial scene, since there’s no credit check to qualify. Since you can’t spend beyond the loaded value, prepaid credit cards have the built-in tool for self-discipline that both monitors your spending and prevents you from spending beyond your means.

One very important thing to understand about prepaid credit cards, however, is that they do not help you rebuild bad credit. While prepaid credit cards may be a blessing to people with bad credit, they should only be considered a temporary fix – a bridge while you are in the credit remediation mode of improving your credit worthiness.

If your objective is to rebuild bad credit, you need a credit card that reports to the major credit bureaus – and a prepaid credit card does not do that. What you need in that case is a secured credit card, which acts pretty much like a prepaid credit card, but is linked to a bank deposit.
Some people confuse a prepaid credit card with a secured credit card for bad credit. There’s a big difference. With a prepaid credit card, you are merely paying with your own money – it really isn’t rebuilding your credit. So while a prepaid credit card may help you with on line shopping, hotel reservations and purchases at your grocery store, it is doing nothing to build up your credit rating. A secured credit card for bad credit is however reporting to the three major credit reporting agencies so that successful use of them can eventually qualify you for better cards.

Having laid out the nuts and bolts of prepaid credit cards, we can now take a look at some of the neat benefits of these financial tools. For parents who want to introduce their teenagers and college-age children to disciplined financial management and responsibility, a prepaid credit card is the perfect tool when the kids leave home. They have to learn to use the card judiciously without the temptation of a spending spree.

Many people don’t like to deal with banks. The prepaid credit card is a great alternative to banks. Many employers even offer their employees who opt for direct deposit of their paychecks to their checking or savings account the alternative of having them routed to their prepaid credit card. Since an open-loop prepaid credit card can be used like any credit card to pay bills, it is a true alternative to a traditional bank account.

Perhaps one of the most practical side benefits of prepaid credit cards is their ability to help you manage your budget. For instance, if you have budgeted a certain amount for restaurants and eating out, you can set aside a prepaid credit card earmarked specifically for eating out. Say you load it with $400 as your limit for this pleasure for the month. Once you spend it down, that’s it! No more restaurants until the following month! A designated prepaid credit card is a much better way to stay within your budget than paying the dinner checks with cash indiscriminately.

Along the same lines, you can set aside additional prepaid credit cards to manage other line-item budget categories, such as vacations, groceries, clothing, etc. Obviously, if you use prepaid credit cards in this manner, you’ll want to shop around for no-fee or low-fee prepaid credit cards.

Network branded (Visa, MasterCard, etc.) prepaid credit cards provide users with the convenience, protection and flexibility of a Visa or MasterCard credit card. You also have most of the same theft and loss protections as a regular credit card. In addition, you have some of the same protections for a prepaid credit card as offered by a bank. For example, the amount on your prepaid credit card or debit card is FDIC-insured up to $250,000. And if that isn’t enough, you enjoy the financial satisfaction of spending only the money that is actually available to you at the time.

With these many advantages of a prepaid credit card, the primary caution we leave you with is that, all things considered, the reality is that a prepaid credit card is a financial services product offered by competing financial institutions. Therefore, consumers must shop around for the prepaid credit card that best fits their needs. Various financial institutions offer different packages for their products and services. Prepaid credit cards, therefore, have different benefits, different features and different fee structures. Look for the one that fits your personality and lifestyle, and use it wisely!

Be the first to comment on "Understanding Prepaid Credit Cards"

Leave a comment

Your email address will not be published.