A prepaid credit card is offered by a financial institution or private company. It is not a traditional credit card because an individual is not borrowing money and paying it back later. Instead, it is similar to a gift card because money is loaded onto it as a form of deposit. Sometimes a prepaid credit card is called a secured credit card.
Prepaid Credit Cards
A prepaid credit card requires you to load money onto an account so that you can spend it on the card. There are no overdraft fees and it doesn't allow you to spend more than you've loaded.
Prepaid credit cards are a good option if:
- You're looking for a way to make purchases online
- You want to ease into using plastic responsibly
- You're looking for something safer than cash
- You'd like to track your spending without a bank account or credit card
Prepaid credit cards do not report to any credit bureaus, so they're convenient, but they won't improve your credit score. If you're looking for a way to improve your credit score, you may want a secured credit card instead.
Secured Credit Cards
Many people receive secured credit cards offers in the mail while others search for issuing companies online. A secured credit card requires an application. Almost everyone is going to be approved for this type of credit card. The credit limit and fees varies according to the issuing company.
Once approved for the secured credit card, you must pay a security deposit to set up the account. For instance, if you received a credit limit of $1,000, you must deposit $1,000 onto the prepaid credit card. After the issuing company receives the deposit, you will receive your prepaid credit card.
Each month, the cardholder receives a bill for the amount of money that was charged to the card. Although policies vary, the bill is always due by a certain due date. If a payment is missed, the cardholder is charged a penalty just like he or she would with a traditional credit card. Interest charges are also added.
Secured credit cards are typically a good resource for someone trying to improve his or her credit. In fact, these credit cards are often offered to individuals with poor or less than ideal credit. With regular payments, the card may be converted to a traditional credit card and you'll be refunded your security deposit.
However, there are some disadvantages. Secured credit cards typically come with high fees and interest. If one payment is missed, the amount owed quickly accumulates. When the cardholder can’t pay, the security deposit is often taken by the issuing credit card company to pay the debt.
If you're looking for the convenience of a credit card, without the risk, a prepaid credit card is for you.
