How Does a Prepaid Card Work?

Using Prepaid Credit Cards as an Alternative to Real Credit Cards

Woman using credit card at laptop
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It's pretty easy to mistake a prepaid card for an actual credit cards. For the most part, prepaid cards look identical to credit cards and can be used in most places that credit cards are accepted. For instance, you can use a prepaid card for car rentals, hotel reservations, and airline bookings. The benefit of a prepaid card is that you can get one even if you have bad credit. However, as the name indicates, you can't use the card unless you prepay it.

Because of that, it's not an actual credit card.

How Does a Prepaid Card Work?

With a prepaid credit card, you deposit money onto the card, sort of like a gift card. Then, as you use your prepaid card, the amount of your purchases is deducted from the balance. As you make purchases, your available balance is reduced.

Let’s say, for example, you deposit $300 onto your prepaid credit 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 your prepaid credit card before you can use it again.

By comparison, a credit card gives you a credit limit that you can borrow against for purchases. You have the option of repaying your purchases little by little over time or all at once.

Managing a prepaid credit card is more like managing a checking or savings account than managing a credit card. You don’t have to worry about interest, finance charges, or late payments.

What you have in your account is all you’re able to spend. On the plus side, there’s no revolving balance, minimum required payments, or due dates to think about.

How Much Does it Cost?

Prepaid credit cards can come with a lot of fees. For example, the Account Now Prepaid Mastercard, has charges a monthly fee of $9.95, an ATM withdrawal fee of $2.50 (per transaction), up to $4.95 reload fee, $2.50 for each ACH transaction on your account, $1.50 to make a balance inquiry at ATM and $1.00 for each monthly statement.

Each time you incur a fee, it comes from your balance, giving you less money to spend.

The cost pays a big role in the prepaid card you choose, so make sure you pay close attention to the fee schedule of any prepaid card you're considering. Pick the card that charges you the least amount of fees.

Who Might Use a Prepaid Credit Card?

You might sign up for a prepaid credit card if your bank doesn’t carry Visa- or MasterCard-branded debit cards and you don’t have a credit card, or if you can't get a checking account because you have a bad credit with ChexSystems. This will allow you to spend money as if you had a credit or debit card, though you really don’t have one.

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

Prepaid cards aren't just for people with bad credit or those who can't get a checking account. Some people use prepaid cards to help manage their budget. For example, you could lose your $300 grocery budget onto a prepaid card to keep from overspending.

Others opt for prepaid cards because they're unsatisfied with traditional banks.

Will It Help Rebuild Credit?

You can get a prepaid card regardless of your credit history. Providers don't check your credit because you're not borrowing money. But, a prepaid credit card won’t help you establish or improve your credit. Using a prepaid card says nothing about your borrowing or repaying habits, so the card companies don’t report to the credit bureaus. If you have a prepaid card, it won’t appear on your credit report or influence your credit score.

If you’re looking to rebuild your credit, a secured credit card is a better option. It’s similar to a prepaid card in that you have to make a deposit to get the card. But, it’s actually a credit card. The deposit acts as collateral in case you don’t pay your credit card balance.