What Are Prepaid Debit Cards?
Prepaid debit cards (also known as prepaid credit cards,
stored-value cards and reloadable debit cards) are just like credit cards
except, as you might have guessed, you prepay or "fill" your
account with money before you use the card. You are not extended a line
of credit and therefore you do not go into debt and you don't pay any
interest charges. In this way, prepaid debit cards are quite different
credit cards. But the best part about having a prepaid credit card
is that you can use them just like a standard credit card to buy computers,
movie rentals, music, or just about anything else a standard
credit card can get you.
Prepaid debit cards are great for:
- Students who generally don't have an established credit history.
- Those who have had some debt or credit problems in the past
and are finding difficult to obtain a regular credit card.
- People who simply can't stand the idea of going into debt.
Prepaid Debit Cards: The Advantages
Prepaid debit cards are very easy to get when compared to regular credit
cards. You can order a prepaid debit card online with no worry about credit
history checks or other encumbrances like income requirements. There are
also many other benefit to getting a prepaid debit card, including:
- No Debt: You'll never have debt
that accumulates as with standard credit cards. This can mean peace
of mind for those who have trouble managing their debt. A prepaid
credit card simply stops working once the funds you deposited into
it run out.
- No Interest Charges: You'll
never pay any interest charges with a prepaid debit card, a major
advantage over standard credit cards. Interest charges can become
extremely burdensome, especially for those with high interest credit
cards. When it comes to credit card debt: interest charges are the
credit card companies' best friend, and the credit consumer's worst
- No Exorbitant Fees: Prepaid
debit cards aren't free, but you'll never pay an over-the-limit fee,
late payment fee or any of the other fees that regular credit cards
usually have. That can mean a lot less worry and stress for you.
- No Credit Checks: You won't
be subject to a credit check when you apply for a prepaid debit card,
which also means that just about anyone can get approved for a prepaid
- Prepaid Card As A Teaching Tool:
A great way for a parent to teach a high school- or college-bound
teen about finances and budgeting is to give him or her a prepaid
card. Not only can parents monitor their child's spending habits online
(most prepaid cards allow you to track transactions via the Internet),
students can also learn about the importance of budgeting and spending
wisely, without having to worry about hefty interest charges, draconian
fees and oppressive debt if a money-related mistake is made.
- Fraud Protection: Most prepaid
debit cards feature the same fraud protection that's offered with
standard credit cards. Prepaid card issuers that offer fraud protection
generally refund to the cardholder any charges that the cardholder
Prepaid Debit Cards: The Drawbacks
= "Prepaid credit card" is a misnomer.
A credit card extends a line of credit to the cardholder. Prepaid debit
cards do not. In fact, prepaying a credit card has the potential of making
you appear suspicious.
- Setup Fee: With prepaid debit
cards, you'll have to pay a setup fee in order to open a prepaid credit
card account. The setup fee can be as much as $50 (most prepaid credit
cards have a setup fee that is much less than $50.) This might seem
high, but it's a one-time fee, and when compared to the fees and interest
associated with regular credit cards, it's really not that bad.
- Automatic Rebilling: Another
disadvantage to getting a prepaid debit card is that you may not be
able to use a prepaid credit card for transactions that bill your
card automatically on a regular basis (recurring payments.)
- Credit History: You can use
a standard credit card to pay for the goods and services you want
and need in life. You'll receive a statement every month and you'll
either pay the minimum amount due, the total balance due or a sum
that is somewhere in between. The payments made to a standard credit
card company are recorded, not only by the credit card company but
also by one or more of the 3 major credit bureaus: TransUnion, Equifax
and Experian. This activity becomes a part of your credit history
(also known as your credit profile), and if you've been able to make
steady payments on a standard credit card for 2 or more years, your
reliable and timely payments become a very attractive part of your
credit profile (attractive to the banks and other financial institutions.)
With the vast majority of prepaid debit cards, there is no reporting
to the credit bureaus, which means that any and all spending you do
with your prepaid credit card will neither add favorably nor detract
from your credit profile. If you are the type of person who has trouble
managing their debt, then this can be a good thing. However, if you
are the type of person who pays bills on time every time, then using
a prepaid credit card would be a wasted opportunity to enhance your
This website is neither affiliated nor associated with The United States
Federal Reserve in any way.
Information in this website is provided for educational purposes only. The
owners of this website
make no warranties with respect to any and all content contained within
this website. Consult a
financial professional before making important decisions related to any
investment or loan
product, including, but not limited to, business loans, personal loans,
education loans, first
or second mortgages, credit cards, car loans or any type of insurance.