announcement

Update: Check new design of our homepage!

How Do Prepaid Credit Cards Work

How Do Prepaid Credit Cards Work

In the following article we will try to understand what are prepaid credit cards. Also, its complete mechanism, and important features of prepaid credit cards have been discussed in the following paragraph.
WealthHow Staff
A credit card becomes an absolute necessity, on several occasions, and modern 'e-commerce', that functions through the Internet depends completely upon its use. In the era past the recession, the individuals in the United States have been suffering from two major credit card related problems. Firstly, bankruptcy, foreclosure, unemployment, high volumes of debt and in general, the harrowing tide of the recession have left the credit reports, ratings and scores battered, owing to which credit card applications are being rejected. Secondly, excessive debts and financial hardships have led to a sort of phobia among the common American public about common credit cards. The best alternative in such a situation is a prepaid credit card. Such a credit card has three chief advantages:
  • Since this credit card is a prepaid credit card, the company does not undertake a credit check, nor there is any credit score requirement, and hence any person can avail the card.
  • The second advantage is that the company gives a positive report to credit rating agencies when you use the card.
  • Lastly, due to the inherent mechanism, prepaid credit cards cannot accumulate debts.
On the whole, prepaid credit cards can be used by any person without the worry of accumulating debt, and at the same time also take the advantage of the growth of the credit score. The unique mechanism of this card service makes it a great tool for financial management in post recession periods.

How do Prepaid Credit Cards Work

The concept of the prepaid credit card is self-explanatory through its name, it's a credit card that's prepaid. In a nut shell, when you get a prepaid credit card, you automatically open an account with the credit card company, into which you can deposit money by the way of checks, or transfer of money from savings accounts or other means of transfer. This act of putting the money into the card's account is referred to as 'loading' or 'charging' the card with money, which you can spend through the card. Every load or swipe of the card is positively reported to the credit reporting agencies, which enhances/increases your credit report. Some of the important features of such credit cards include the following:
  • Instead of having a credit limit, the prepaid credit cards can be used till the loaded/deposited funds are exhausted.
  • The credit card company charges a certain amount for the use of the cards, that is monthly fee is charged for the card and for certain transactions such as ATM withdrawals and balance inquiries.
  • Apart from the aforementioned services, there are some additional features which are offered such as cash back and bonus services.
Technically, a prepaid credit card, is not even a 'credit' card, but can be termed to be a quasi credit card as the credit report does get affected in a positive manner when the credit card is used.

There are only two drawbacks of using this card. Firstly, you get slapped with several different fees, depending upon transactions and also the monthly fees. Secondly, after the card's funds have been exhausted you have to re-load or recharge the card by paying the credit card company, which tends to be a bit inconvenient in some situations.

Additional Features of Prepaid Credit Cards

Credit card companies such as Visa and MasterCard tend to offer some additional features and facilities for the prepaid credit cards, which are often found on reward, point accumulation and cash back credit cards. In fact, almost every credit card tends to have some or the other service. Let's take a look at some examples of such features:
  • A cash back is a facility where a certain percentage of what you have spent through the card gets, added on to the cards 'load'. Conventionally the cash back is offered at a rate of around 10% or 5% or so, and is principally small.
  • Instead of offering a cash back, some credit cards also offer 'reward points' which is essentially a cash back, but it can be spent at stipulated retail locations only. Alternatively, the retail stores offer a discount which is equivalent to the monetary worth of the accumulated points.
  • Some card services on the other hand do not charge fees when specified ATM or retail facilitates are used. Similarly, some also do not charge fees for things like for $1,000 spent or first few months.
  • In some cases such as grocery shopping or payments at gas stations, the cards do not charge fees or offer high discounts or cash backs.
It must be noted almost all the credit card companies such as American Express, Visa and MasterCard offer such credit cards. One of the best things about these cards is that the APR, fees and fines would never affect you. In short, this system overcomes several of the drawbacks of the common credit cards.