Prepaid cards, also known as prepaid debit cards, let you load money onto a card and use it just as you would a debit card. Unlike other debit cards, though, a prepaid card doesn’t draw directly from your checking account.
Because it has a Visa, Mastercard or American Express logo, you can use it wherever those credit cards are accepted, even though you’re not using credit. When you make a purchase you’re spending money that you have “prepaid.” When it’s gone, you can reload the card with more money. With many prepaid cards you can directly deposit and transfer funds from your bank account.
The downsides of prepaid cards
Since prepaid cards aren’t credit cards, they don’t report your credit history to the three major credit reporting agencies. Therefore, using one won’t affect your credit score – for good or bad. You can’t use it to help build your credit as you would with a credit card (or a secured credit card).
There are also limits. You may not be able to use a prepaid card to hold a car rental or hotel reservation. Fees — for opening the card, keeping the account, loading money or using it for purchases – vary but they can be high. A prepaid card is more costly to use than, for example, an ATM card or checking account. And debit cards carry less consumer protections than credit cards in the case of a dispute over merchandise you purchased with one of these cards.
The upsides of prepaid cards
On the upside, there’s no need to make a deposit that’s held by the bank, as you would with a secured credit card. A prepaid card can be used just like a check, and it’s more convenient.
There are no interest charges and you typically can’t default or overspend on a prepaid card as you might a credit card. If you’ve reached the limit of your funds, your purchases will be rejected unless you’re using a type of prepaid card that allows overdrafts. Managed carefully, a prepaid card lets you avoid debt and finance charges.
There’s no need for a credit check for this type of card. No matter how bad – or non-existent — your credit is, if you have cash to load onto a prepaid card, you can probably get one and use it in place of a credit card.
When to choose a prepaid card
You don’t need to have bad credit to use a prepaid card. They’re also used by people who don’t want to use credit or make monthly payments but who like the convenience of paying with plastic.
Prepaid cards are great if:
- You’ve got bad credit or no credit.
- You want to keep a tight rein on your spending.
- You want to give a gift of money.
- You want to help your child learn to manage money responsibly.
- You want to save for a special occasion: Load up a card with money you’ve saved for a trip or a shopping spree.
How to get a prepaid card
You’ll find a variety of offers for prepaid cards using Credit.com’s credit card search tool. The fees can be steep. It’s important to read all the fine print carefully on card offers. Compare any fees involved, including monthly maintenance fees, activation fees and ATM use fees. If you use a card that lets you spend more than you’ve deposited, you could incur hefty overdraft fees.
Learn your credit score first
Even though a credit check typically is not needed to obtain a prepaid card, it’s still a good idea to know what your credit score is. Don’t know your credit score? No problem. Use Credit.com’s free Credit Report Card to obtain a free credit score from Experian, and a VantageScore 3.0 credit score, which was developed by the three major credit reporting agencies.
Learning your credit scores before applying can help you in two ways — if you do decide to apply for credit: You apply only for cards for which you qualify, helping you avoid having an application rejected, and you spend your efforts only on the cards likely to accept your application.
The free Credit Report Card updates your scores once a month, and lets you view your progress as you build up your credit.