What Is a Prepaid Credit Card

You know about credit cards and debit cards, and you may even be familiar with secured credit cards, but did you know there’s another option out there? Millions of Americans rely on prepaid credit cards to handle their finances.

Prepaid credit cards work just as you’d expect: after acquiring a card, you load it with money. As you spend, money is deducted from your balance. When you’re running out, you reload the card.

Prepaid cards work well for many people. Still, they’re not right for everyone — and there are definite drawbacks. This article will provide some objective details about prepaid cards: the good, the bad, and the ugly. With this information, you can assess whether a prepaid card is a good fit for you.

Who Can Benefit from a Prepaid Card?

The unique features of prepaid cards make them very useful in certain situations. For example:

  1. If you are one of the millions of Americans seeking an alternative to traditional banking, prepaid cards can essentially take the place of the basic functions of a bank. You’ll be able to hold your funds, keep track of your balance, and spend as needed.
  2. If you have little, poor, or just no credit history. Prepaid cards are often chosen by people who might not qualify for a standard credit card. Since you can only spend as much as you have on the card, the issuer incurs very little risk. For that reason, they are typically willing to provide cards to people with any credit profiles.
  3. If you are looking for an effective budgeting tool. Unlike with standard credit cards, a prepaid card won’t allow you to carry a negative balance. When the money’s gone, it’s gone; that can help you stay on budget and avoid debt accumulation.
  4. If you’re a young person who has limited experience managing money. Prepaid cards can be a good low-risk introduction to the world of credit cards and personal finance.

If any of the above categories apply to you, you may be able to benefit from a prepaid credit card. Keep reading to learn more about the advantages and disadvantages of taking this route.

What Are the Advantages of a Prepaid Card?

Like most financial tools, prepaid credit cards have both benefits and drawbacks. Let’s start by looking at upsides:

  • For those who have problems with compulsive spending, prepaid cards can be a great option. Again, you can’t spend more than what you put in!
  • Reloading prepaid cards is usually a very simple process.
  • Prepaid cards do not require a credit check. This is important as it gives people with bad credit a simple way to pay for things with plastic, like online purchases or bill payments.
  • Many employers are happy to deposit your paycheck directly onto your prepaid card.

What to Look Out for When Shopping for a Prepaid Card

Unfortunately, prepaid cards aren’t all sunshine and roses. In fact, prepaid cards have earned something of a bad rap — especially after recent press about some employers using prepaid cards in lieu of traditional paychecks.

Let’s look at the drawbacks you’ll want to consider before obtaining a prepaid card. Keep in mind that not all prepaid cards operate the same way, so you should invest some time in selecting one with as few of these downsides as possible.

  • Prepaids won’t help your credit score
    • Any bill payments you make with your prepaid card may get reported to a credit reporting agency called the PRBC, but not to Experian, TransUnion, and Equifax – the credit agencies that make up your FICO score. For all intents and purposes, your FICO score is your credit score: used for getting a credit card, car loan, mortgage or lease. So if you’re interested in improving a poor credit score, you should look at secured credit cards instead of prepaid cards.
    • Keep in mind that, while some legitimate prepaid cards may help you build credit history, they will not improve your credit score since you’re not paying off a debt.
  • Hidden fees
    • While standard credit cards make money based on interest rates, prepaid credit cards don’t have interest rates. That means they need to make their money elsewhere, and in this case, it’s via hidden, and often steep and plentiful, fees. With many prepaid credit cards, you can expect the following:
      • An initial setup fee
      • Monthly maintenance fees
      • Fees for using an ATM
      • Fees for reloading money onto the card
      • Fees for checking your balance
      • ATM access

The Best Prepaid Cards

Despite the drawbacks, many people find that prepaid cards are the best choice for their financial management. If you’re one of these people, we’ve compiled a list of TSD Approved Prepaid Cards. These cards feature minimal fees and are easy to use.

  • READYdebit Prepaid Visa
    • Offers free Credit ScoreTracker to help you track your credit
    • Monthly fee + ATM fee; minimal additional fees
  • US Bank Convenient Cash Card
    • $39 account fee; no usage fees if you use U.S. Bank for transactions
    • Load cash for free at any U.S. Bank Branch
  • Chase Liquid
    • $59 account fee; no usage fees
    • No max card value
  • Green Dot Card
    • Straightforward fee structure with minimal fees
    • You can add funds either in a store or online
  • Bancorp Bank Purple Diamond Prepaid Visa RushCard
    • Charges an activation fee
    • Allows you to transfer money from one card to another at a low cost: an excellent alternative to wiring money

Make sure to check the card issuer’s website for details about terms and conditions of offer.

The Bottom Line

If you’re thinking that a prepaid card may be right for you, make sure to read the fine print. (Yes, really. All of it.) Not doing so can end up costing a lot of money in fees.

The right prepaid card can be a great tool to help you responsibly manage your finances and safely make online payments, but if you’re looking to improve your credit score, you should consider a secured credit card.

Best of luck, and happy fine print reading!

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