What is a Prepaid Card?
Key points about: the differences between prepaid cards and credit cards
Unlike a credit card, a prepaid card must be loaded with funds before it can be used for purchases.
Prepaid cards don’t require an application or personal information.
Prepaid cards don’t help you build a credit history.
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 you determine the value of the card based on the amount of money you load onto it, prepaid cards may inherently limit overspending behavior.
Despite their similarities, prepaid cards are not credit cards in the traditional sense.
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, the account number, and may include a chip on the card’s front. The back typically includes a security code and, potentially, the cardmember’s signature.
You might use a prepaid card just as you would use a credit card, including inserting it into a terminal or keying it into a website’s checkout page. But unlike credit cards—which allow cardholders in good standing to “buy now, pay later”—when you use a prepaid card, you can use only as much money as available on the card. 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 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 variables such as, the way funds are loaded, usage, or for other transactions, like checking the prepaid card’s balance.
Differences between prepaid cards and credit cards
Prepaid cards limit you to the amount you load on the card
Some prepaid cards are designed for extended use and allow cardholders to load funds onto the prepaid card. This can be done 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 you to have your own funds available.
Prepaid cards don’t help you build a credit history
While many financial institutions do offer prepaid cards, you don’t need to have a bank account, or “good” credit, or a positive financial history to obtain or use a prepaid card.
Did you know?
Because prepaid cards don’t involve borrowing, the prepaid card issuers don’t report the activity to the credit bureaus, and don’t 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.
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