There’s no denying how convenient using a credit card daily is. Cardholders can use their cards in stores at home and abroad, and they can use them for online shopping, paying utility bills, and more. However, their most significant drawback is that all the fees can quickly accumulate if you carry a balance. You’ll have to face the high-interest fees, then if you miss a credit card payment, you’ll have to pay the late payment fees, if you max out your credit card, your credit score will suffer, etc. While they can be invaluable, credit cards are a huge responsibility. If you don’t feel like you can be a responsible cardholder, you can get almost all the benefits of credit cards with none of their drawbacks with prepaid cards. These cards still require you to use your money wisely, but they’re much easier to handle and don’t allow you to go into debt. Let’s take a closer look at these cards.
Overview of Prepaid Cards
As its name would suggest, to use a prepaid debit card, you’ll first need to load your card with funds. The amount of money you have on your card is the amount that will be available for you to spend, and you cannot spend more than you have. All the major card networks allow you to get a prepaid card, and you can use your card the same way you would any of your other Visa, Mastercard, American Express, or Discover cards. So, why would you choose a prepaid card instead of another card?
What are the four main reasons for getting a Prepaid Card?
- You don’t need a bank account to get a prepaid debit card. You can get the card from certain retail stores or issuers or order one over the phone or online, so there’s no need to open a new checking account.
- Since you don’t need to open a bank account and will not borrow money from banks or credit unions, your prepaid card won’t affect your credit score.
- There’s no credit check, so regardless of your credit history or poor credit, you can get a prepaid debit card and take full advantage of it. You don’t need to worry about getting approved.
- These cards come from the major card networks, so you can use them wherever the network’s accepted. You cannot have a negative balance so you won’t be charged any late payment fees or interest rates. You can still easily make purchases with your card, withdraw cash from an ATM, reload your card, etc.
Prepaid Card vs Regular Debit Card
Prepaid debit cards and regular debit cards have a lot of similarities. You’ll need an existing balance from which you can draw money to use either. The difference is, however, that you don’t need a bank account for this card. A regular debit card is connected to your checking account, and when you make purchases, the card draws money from the account.
RELATED: Differences Between Prepaid and Debit Cards
Depending on the type of debit card, your bank may allow you to overdraw from your account, and it’s essential to be aware of this. You will have a limit on how much you can overspend with regular debit cards. However, the overdraft fees tend to be very high and can pile up if you’re not careful. With prepaid cards, you won’t encounter overdraft fees simply because you cannot spend more than what you have on the card. If you attempt to make a purchase that costs more than you have, the purchase will be denied.
Prepaid Cards vs Credit Cards
Prepaid and credit cards are entirely different, yet they’re often confused simply because they look similar. As mentioned, a prepaid debit card can be taken from any significant card network to have the same appearance and logo as credit cards from Visa, Mastercard, or the like. When it comes to credit cards, however, when you use them to make a purchase, you are borrowing money from your credit card issuer. Credit cards are essentially loans and should always be regarded as such. You aren’t borrowing money from anyone when you use your prepaid debit card. You’re using the money you’ve deposited to your account to make purchases, so it’s just like using your cash. Also, read Debit Cards vs Credit Cards.
Prepaid Credit Cards, aka Secured Credit Cards
Prepaid credit cards shouldn’t be confused with prepaid debit cards, as they differ vastly. Prepaid credit cards are another name for secured credit cards, and they function very differently from prepaid debit cards. A secured credit card requires you to deposit money to use your card, and this is true. However, the deposit is there for safety reasons. If you fail to make your credit card payments on time, your issuer will take your deposit. If you pay off your balance and decide to close the account, you will get your deposit back. To get a secured credit card, you must go through the same application process as you would for a regular credit card. This isn’t required for a prepaid debit card.
RELATED: Secure Cards Explained
Can I get a Prepaid Card with Poor Credit?
Your credit score isn’t even considered when you get your prepaid debit card, so these cards are excellent for those with poor credit. There is no full credit check, and applying for a prepaid debit card doesn’t leave a trace on your credit report, so you can apply for as many cards as you want, and using your card won’t affect your credit score.
The problem is that since prepaid debit cards cannot negatively affect your credit score, they cannot affect it positively. If you want to start your credit history or rebuild your credit, you won’t be able to do this with a prepaid debit card. Even if you use your card responsibly, this won’t be reported to the credit bureaus and won’t affect your FICO score.
What Are Prepaid Card Fees
Prepaid cards are the cheapest type of card that you can hold, but they can still come with some fees. Some of the most common fees you can encounter include but are not limited to:
- Monthly fees. A monthly fee (or an annual fee) is commonly paid for having a prepaid debit card. If your card comes with a monthly fee, it doesn’t matter if you use it in the given month; you will have to pay it. However, certain cards will waive this fee if your salary or other benefits are deposited directly into the card. See No Annual Fee Cards.
- Transaction fees. You might be charged a small fee every time you use your prepaid debit card to make a purchase. Many cards come either with a transaction fee or a monthly fee – they rarely have both included.
- Balance inquiry fee. You might be charged a small balance inquiry fee if you want to check your balance at an ATM. This is easily avoided, as most cards allow you to check your balance for free online, through email, or by text message.
- ATM withdrawal fee. If you withdraw money from your prepaid debit card, you will likely have to pay the ATM withdrawal fee. This fee will typically be higher if you use an out-of-network ATM. Using an in-network ATM will be much cheaper, and you won’t have to pay the withdrawal fee.
- Decline fee. If your card charges a decline fee, you must pay it if you attempt to use more money than you have available on your card.
- Card replacement fee. While you can typically get your physical prepaid debit card for free, if your card gets lost, stolen, or damaged, you will most likely have to pay a fee to get a replacement. These are just some of the most common fees that you can encounter. You must check your prepaid debit card’s Pricing and Information section to learn which fees you might encounter and how high they are.