What Is A Prepaid Credit Card And How Does It Work?

By Alley Benton
Updated December 9, 2015
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What Is A Prepaid Credit Card And How Does It Work?We live in a world that revolves around credit so it can be pretty inconvenient if you don't have one. In most cases, if you want to rent a car, make a hotel reservation, or even book a travel ticket it is impossible to do these without a credit card. This is why so many people are looking to use prepaid credit cards as an alternative to carrying a line of credit at a bank or financial institution.

What Is A Prepaid Credit Card?

This credit card is simply a Visa, Mastercard, or an American Express card that is backed by money you deposit on the card. You can only use the card if you have deposited enough money to cover your expenses.

The system works very much like a gift card. As you make purchases, the cost is deducted from the money you've deposited until it runs out, at which point your card will no longer work, until you reload.

Managing a prepaid card is very similar to managing your checking account. Unlike with a traditional credit card, there are no interest fees or finance charges, and there's no bill that comes at the end of the month. Your balance in your account is all that you have to spend. There are neither overdraft fees nor are there any late charges to worry about. However that doesn't mean that there is no cost to having a prepaid credit card.

The Costs

When it comes to choosing the right prepaid card for you, it is important to do some research. While they may not have the standard fees of traditional credit cards, the fees they do charge can easily add up.

For example, one prepaid card charges an activation fee of $9.95, which will immediately be taken out of the money you deposit. They also charge a monthly fee of $9.95, plus a $4.95 reload fee, $1 for purchases and another $1 to check your balance. ATM fee is $2 and you will need to pay $2 to talk to a customer service rep.

It is easy to see how owning such type of credit card can quickly become expensive. Every time they charge a fee it will come from the deposit you put on your card. If you're going to be using your card a lot, it will be wise to calculate what all those fees will cost you over time.

Why Use A Prepaid Credit Card?

The majority of people who use these cards are those who have a poor credit history or are unable to get the traditional credit card for some reason. Parents often give them to their college children when they are attending school far away from home. Parents can reload the money in their location and students can use it to meet their expenses without having to go through the hassle of wiring money.

Who Should Not Use A Prepaid Credit Card

Those who are looking to rebuild their credit, should avoid using this type of card. None of your purchases or regularity of deposits will be given to the credit reporting agencies. For that it is best to use a secured credit card. While it works in much the same way, secured by a deposit, it is an actual credit card and your deposit is used as a collateral in case you fail to pay your balance when it comes due.





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This site offers information designed for educational purposes only. You should not rely on any information on this site as a substitute for professional medical advice, diagnosis, treatment, or as a substitute for, professional counseling care, advice, diagnosis, or treatment. If you have any concerns or questions about your health, you should always consult with a physician or other health-care professional.