How Does a Prepaid Credit Card Work?

Using Prepaid Cards as an Alternative to Traditional Credit Cards

Illustration listing the key features of prepaid credit cards

The Balance / Chelsea Damraksa  

Many Americans are unable to qualify for a credit card—or they simply don't want to. But, in today's world, it can be difficult to function without one. The good news is, prepaid credit cards offer a way to get many of the benefits of standard cards without some of the challenges.

You can get a prepaid card even if you have bad credit. However, as the name indicates, you can't use it unless you've prepaid money onto the card. Since a prepaid card doesn't allow you to carry a credit balance and pay later, it's not a true credit card.

Around 6.5% of American adults don't have a bank account, but they can rent a car or book a hotel room with a prepaid card instead of having to deal with a bank. Many prepaid cards even have a routing number and an account number, so people can have their paychecks deposited to their prepaid card account. Learn more about how these credit and bank alternatives work.

How Does a Prepaid Credit Card Work?

Visually speaking, it's pretty easy to mistake a prepaid card for an actual credit card. For the most part, prepaid cards look identical to credit cards, carry a card network emblem, and can be used in most places that accept credit cards.

Before you can use a prepaid card, you'll have to load money to your account, similar to how you would with a gift card. You can only spend as much as you've loaded onto your card. As you use your prepaid card, the amount of your purchases is deducted from the balance. Your available balance is reduced even further as you make more purchases.

Let’s say, for example, you deposit $300 onto your prepaid card. After paying $150 for a car rental, you’d only have $150 left to spend. Once you’ve used your entire balance, you have to reload more money onto the prepaid card before you can use it again.

By comparison, a credit card gives you a credit limit against which you can borrow for purchases. You have the option of repaying your purchases with monthly installments or all at once.

Managing your prepaid card is more like managing a checking or savings account than managing a credit card. You don’t have to worry about monthly minimum payments, finance charges, due dates, or late payments. Your spending limit equals whatever dollar amount your card currently holds. You'll also have no increased revolving debt balance, minimum required payments, or due dates to think about, and no risk to your credit score.

Do Prepaid Cards Build Your Credit?

You can get a prepaid card regardless of your credit history. Providers don't check your credit because you're not borrowing money. Unfortunately, that also means prepaid cards won’t help you establish or improve your credit.

Using a prepaid card says nothing about your borrowing or repayment habits, so the card companies have nothing to report to the credit bureaus. In short, if you use a prepaid card, it won’t have any influence on your credit score, good or bad.

If you’re looking to rebuild your credit, consider a secured credit card as a better option. It’s similar to a prepaid card in that you have to make a deposit, but it’s actually a credit card. The deposit acts as collateral in case you don’t pay your credit card balance, and your payment history gets reported to the credit bureaus.

How Much Does It Cost?

Prepaid cards can come with a variety of fees. Before choosing a card, read the "fine print" to determine which option comes with the least amount of fees, so that they don't eat up whatever money you deposit to the card.

For example, the Account Now Prepaid Visa charges a monthly fee of $9.95, an ATM withdrawal fee of $3 per transaction, up to a $5.95 fee to reload additional funds to the card, $2.50 for each ACH transaction on your account, and $1.50 to make a balance inquiry at an ATM. Each time you incur a fee, it comes from your balance, giving you less remaining money to spend.

Since the cost plays a big role in the prepaid card you choose, make sure you pay close attention to the fee schedule of any card you're considering. Many of them come with no monthly fees and also keep other fees to a minimum.

Who Uses Prepaid Credit Cards?

You might use a prepaid card if your bank doesn’t offer debit cards and you don’t have a traditional credit card, or if you can't get a checking account because you have bad credit with ChexSystems. ChexSystems monitors individuals' checking and savings account activity to alert merchants about people writing bad checks when paying for purchases.

Children and college students also make good candidates for prepaid cards. Parents can load money on the card for their kids to use and begin teaching them good money management skills. For college students, parents can easily reload money onto the card to pay for books, food, and ongoing expenses.

As prepaid cards become more popular, they're not just used by people with bad credit or those who can't get a checking account. Some people use prepaid cards to help manage their budgets.

How Do You Load More Money on the Card?

It's becoming easier to load money on prepaid cards, and you can fill up your card in the following ways:

  • Transfer money from a financial institution or bank.
  • Your employer can direct-deposit your wages onto your prepaid card.
  • You can transfer money from your PayPal account.
  • Reload the card at a retail store such as Walmart or Walgreens.
  • Choose a reloadable card such as Vanilla or MoneyPak.

Article Sources

  1. FDIC. "2017 FDIC National Survey of Unbanked and Underbanked Households." Accessed Oct. 15, 2020.

  2. Experian. "Do Prepaid Credit Cards Help Credit Scores?" Accessed Oct. 15, 2020.