Credit
April 17, 2015

How Does a Prepaid Credit Card Work?

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If your credit has suffered because of financial difficulties and you no longer qualify for a regular credit card, or if you are new to the world of credit, you may be wondering whether a prepaid credit card would be helpful to you. It’s important that you clearly understand any type of financial tool before you decide whether or not to use it. We’ll walk you through the basics of prepaid cards, including how does a prepaid credit card work, how to use a prepaid card, and the benefits and drawbacks of using a prepaid credit card.

As their name implies, prepaid cards are cards that are already loaded with funds you can use to make purchases. Think of them like a reloadable Visa gift card: You deposit money onto a prepaid card as you would for a gift card, and then you can use the balance as you would use a regular card anywhere credit cards are accepted. You can even pay bills using prepaid cards.

Here are some of the top prepaid credit cards to consider:

AccountNow Gold Visa Prepaid Card

  • Best for: People who want a prepaid card with a lot of features. Learn more.
  • Rewards: You get a $15 bonus for qualifying direct deposits from your paycheck onto the card.
  • Features: You can get approved with just an ID verification, with no credit check needed. You can also access the funds from your paycheck 2 days early when you use direct deposit to load your paycheck onto the card.
  • Fees: There is no activation fee, which many prepaid cards have, and no minimum balance required.
  • Learn more about this card here.

Midnight Prepaid Visa RushCard

  • Best for: Easy-to-use prepaid card. Learn more.
  • Features: You get easy sign up. Just pick a secure pin and load money onto your card, and you are ready to go. The card also gives you access to the funds from your paycheck 2 days early when you use direct deposit to load your paycheck onto the card. This card is also protected by the FDIC, which means your funds are safe.
  • Fees: A one-time fee of $3.95 is charged when you first fund your card.
  • Learn more about this card here.

Prepaid credit cards work the same way as debit cards, only instead of drawing funds from your bank account, they use money that you have previously loaded to the card. The cards are reloadable, meaning you can add more money to them in the future. The cards are supported by credit card companies such as Visa, American Express, and MasterCard, and they offer many of the same protections. Anyone can get a prepaid card; no credit check is ever required.

While regular credit cards are a form of loan, prepaid credit cards work more like gift cards. After you register for the prepaid card, you deposit money into the card account ahead of time — just as you would do if you were buying a gift card from a retail store. Once you deposit money into your card account, you can buy items with the card or use it in ATMs until all your deposited money is used up. After that, the card stops working until you put more money into your account. Prepaid credit cards protect you from overspending or from going into debt because you can’t spend more than what you put onto the card. Since the money on a prepaid credit card is not a loan, there is no interest to worry about and no billing cycle or payment schedule.

Here is a good list of the top prepaid credit cards.

Unfortunately, no. The credit reporting agencies don’t pay attention to prepaid credit cards. It might seem as if using a prepaid credit card would be a way to demonstrate that you can handle money responsibly and, thus, help you repair bad credit. Since the card use has no connection to debt, however, it’s like paying for your purchases with cash. Credit agencies are only interested in your debts and obligations; they don’t care about what you do with your cash.

If you are looking for credit cards that can help you boost your credit score:

List of All the Best Credit Cards for Average Credit

Capital One Quicksilver One Cash Rewards Credit Card

  • Best for: People who don’t want to keep track of rotating reward categories. Learn more.
  • Rewards: With this card, you earn unlimited 1.5% cash back on every purchase.
  • Features: There are no rotating reward categories or sign-ups that you need to do to earn your rewards. Your cash back also won’t expire as long as you have the account, and there are no limits on what you can earn.
  • Credit help: You can get access to a higher credit line after you make the first five monthly payments on time. You also get access to the CreditWise app, which can help you monitor your credit profile.
  • Fees: The annual fee is $39.
  • Why get this card: It takes the guess work out of your credit card rewards.
  • Learn more about this card here.

Yes. Prepaid credit cards can be surprisingly expensive. There is an initial setup fee, and another fee every time you load money onto the card. Other fees sometimes apply when you withdraw money from an ATM, and sometimes even when you check your balance. Most prepaid cards charge monthly fees whether you have used them that month or not. Since fees will automatically be subtracted from your balance, you might put the card in a drawer for a while and then discover that all the funds have been used up by monthly fees.

The people who truly benefit from prepaid cards are those who don’t have bank accounts. If you have a checking account with a debit card, you probably don’t need a prepaid credit card. However, if you’re someone who (for whatever reason) does not have a bank account, prepaid cards offer important conveniences. You can use them to pay bills and make purchases online or just as a safe way to store cash until you need it. Furthermore, your funds are protected by Visa or MasterCard in case of theft or fraud, so you can get your money back if the card is stolen. Prepaid cards are also a useful way for parents to give shopping money to their teens since the young person can’t overspend.

Once you understand how prepaid credit cards work, it becomes easy to see the advantages to using one.
First, prepaid cards can help you to avoid credit card debt. After all, you can’t get in debt when you aren’t spending money that you don’t have, which is another benefit to prepaid cards. Because you can reload prepaid cards, you don’t have to get a new one each time yours runs out. While prepaid cards carry their own small fees, they allow you to avoid overdraft fees, check-cashing fees, and other fees associated with a checking account or credit card. They also can help you stay organized compared to if you’re using cash.

As you can see, prepaid cards are sometimes the right choice. If you feel that a prepaid credit card would be useful to you, be sure to shop around carefully to find the card with the lowest costs.

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