Prepaid credit cards are different from traditional credit cards in that you’re spending your own money instead of the banks.
You may be wondering, why would someone choose to get a prepaid credit card? Essentially, it’s very similar to a debit card. There are several reasons prepaid cards are considered:
- Around 68 million people in the US don’t have bank accounts. Prepaid credit cards allow them to still get the functionality of a credit card for purchases.
- Those with bad credit opt for prepaid cards in lieu of standard credit cards.
- For those without bank accounts, prepaid credit cards will provide the option to still have paychecks direct deposited.
- For teens just starting out financially.
If you’re considering this as an option, here are 7 things you should know about prepaid credit cards first.
1. Choose carefully.
Not all prepaid credit cards are the same. Before choosing one, it’s important that you consider the different options and perks available with different cards. Some benefits you can find with some cards are:
- Direct deposit from your employer
- The ability to transfer money from PayPal
- The ability to reload the card in-store
- Ability to utilize with ATM’s
- Mobile app access to check balances, transactions, and reload the card
- Online access to check balances, transactions, and reload the card
- Cash back rewards for using your card for certain purchases or within specific stores
2. Works like a debit card.
Prepaid credit cards are backed by your money, not by credit lent to you by a bank. Essentially, you load money onto the card and continue to refill it as needed. You can use your card at any store you can use credit cards in, and purchases will be conducted the same.
3. Use it as an alternative to banking.
As mentioned earlier, over 68 million American adults do not have a traditional bank account. Banking for some is not an option, and for others is not wanted. Your prepaid credit card can be used just as a credit card and debit card are used; there will even be an account and routing number assigned to the card.
4. It will not build credit.
For those with poor credit who have been unable to secure a traditional credit card, it’s important to understand that a prepaid credit card will not help to rebuild credit. Your credit is not checked when you open a prepaid card; however, similarly, your card usage is also not reported to the credit bureaus. Prepaid cards are still an excellent option for those unable to open traditional credit cards, however.
5. Watch out for Fees.
Just because you are securing the card with your funds doesn’t mean there won’t be fees, unfortunately. Be sure to carefully check the terms and conditions before you sign up. You can see fees for things like loading the card, allowing your balance to go under a certain amount, or monthly maintenance fees.
6. You have protection.
Just because your money isn’t being held with a traditional bank doesn’t mean it’s not protected. Most cards carry federal deposit insurance. This means if you experience theft or loss, you should still be able to get assistance in recovery and replacing the card.
6. Use for money management.
When it comes to budgeting, prepaid credit cards can be of use. Some consumers choose to use prepaid cards to help manage things like grocery spending, gas, and travel. The ability to load a predetermined amount onto the card can help some people to better stay within budget; once the money has been used up, the spending will effectively stop in that area without the risk of running over limits.