What is a Prepaid Card?

Prepaid cards can offer several benefits:

They might eliminate the need to carry cash.

Like a traditional credit card, you may be able to use prepaid cards to shop online, over the phone or in stores.

Because the cardholder determines the value of the card based on the amount of money they load onto it, prepaid cards may inherently limit overspending behavior.

Despite their similarities, prepaid cards are not credit cards, in the traditional sense. Here’s why that difference can have an impact on your financial life if you use a combination of the two, or just one or the other.

How do prepaid cards work?

At first glance, it’s tough to distinguish between a prepaid card and a credit card: Both show the logo of the major card issuer, an account number and may include a chip on the card’s front. The back will include a magnetic strip, security code and, potentially, the cardholder’s signature. A prepaid card might be swiped at certain terminals, or inserted into chip-enabled terminals at the point of sale, or keyed into a website’s checkout page for online transactions — just like a credit card.

But unlike credit cards — which allow cardholders in good standing to “buy now, pay later” — when cardholders pay with prepaid cards, they can use as much money as was loaded to the prepaid card and how much has been spent. You may have seen the term “prepaid credit card,” but the common terms are “prepaid card” or “reloadable card” when referencing a card with pre-loaded funds. When a prepaid card transaction is approved, funds are deducted immediately from the available balance.

Prepaid cards may charge for use

The Consumer Financial Protection Bureau (CFPB) points out that some prepaid cards may charge fees based on how and when funds are loaded to the prepaid card, how much or little the prepaid card is used to make purchases, or for other transactions, like checking the prepaid card’s balance.

Differences between prepaid cards and credit cards

A prepaid card usually doesn’t help you build a credit history

Some prepaid cards are designed for extended use and allow cardholders to load funds onto the prepaid card through a number of methods, including using cash or a check at a store that sells/reloads prepaid cards; a transfer from a checking or savings account; or using direct deposit from a paycheck. But all prepaid cards require that the cardholder have funds available. A cardholder cannot use a prepaid card as a way of borrowing to fund a financial emergency as a credit cardholder might.

Most prepaid cards don’t help you build a credit history

While many financial institutions do offer prepaid cards, cardholders don’t need to own a bank account or have “good” credit or a positive financial history to obtain or use a prepaid card.

Because prepaid cards do not involve borrowing, the prepaid card issuers don’t report the customer’s payment activity to the credit bureaus, so prepaid cards generally do not impact a person’s credit history or credit score. In contrast to prepaid cards, most credit card issuers report to one or more credit bureaus the activities related to your credit card account.

Credit plays a role in many aspects of life, even outside of finance. A credit check may be required to rent housing, or even land a job. Because length of credit history is a factor in credit score calculation, using prepaid cards exclusively would not impact a consumer’s credit score or assist in building a credit history.