Pre-Paid Credit Cards Explained

Prepaid credit cards are offered by a number of banks and credit card companies as a way for a person to loan money to his or herself. Essentially, you will place funds in an account when you open a "credit line." You may continue to use your card until these funds run out, and then you will need to reload the card. This option is often favored by people who do not qualify for a line of credit from a traditional lender like Visa or MasterCard.

Prepaid Cards Are Not Credit Cards

You will not actually be going into debt or using credit when you make a purchase on your card. This means there is no interest payment, and you will not have to make monthly payments or pay down debt at any point. It also means that these cards will have no affect on your credit score. They do not show up as debt on your credit history, either. You are only in debt to yourself, not a lender, when you use a prepaid card.

Prepaid Cards Are Not Gift Cards

Many credit card companies offer "gift cards." These allow a person to purchase a card worth a certain prepaid amount, typically in increments of $50, to give to another person. Gift cards are basically like cash, but they have become popular as cash continues to go out of fashion in a number of establishments. Gift cards are available at many retailers, such as drug stores and grocery stores. They are not connected with any account. A retailer buys these from a company at a discount in bulk. The retailer then charges you a markup on the card when you buy it, typically a few dollars. When the card is activated, the card company simply loads it with the proper amount of funds.

Prepaid Cards fill a Market Need

Prepaid cards arise from a market need for some low income or low credit people to obtain credit cards. For example, plane tickets typically require a credit card to be reserved. Without a credit card, a person may not be able to purchase tickets or hotel rooms in advance. Prepaid cards solve this problem, acting as a "credit card" for those who need one. Any establishment that does not take cash will take this card.

Prepaid Cards Have Disadvantages

Not all payments can be processed on this card, however. If you are looking to set up a recurring payment, like a utility bill, on your card, you may be restricted from doing so. Aside from restrictions, there is also a charge involved with having a prepaid credit card. While there is not an interest rate, you will still have to pay a fee to set up the account. There may be a minimum requirement to open an account and a minimum balance you must maintain on the card. You will also pay fees whenever you reload funds onto the card. Ultimately, the fees are only worth the benefits if you truly cannot get another credit card from a lender.


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