How Prepaid Credit Cards Work

How Prepaid Credit Cards Work

It s a given that a credit card is a necessity in today s financial world. Renting a car, reserving a hotel room and booking airline passage are all but impossible without a card. Online shopping can often be done using services such as PayPal and TeleCheck but credit cards are more widely accepted. Even getting through the checkout line in a store is more convenient with a card than writing a check or sorting out cash.

Unfortunately, it s also a fact that many people can t qualify for traditional credit cards because of a poor credit history or no credit history at all. That s where prepaid credit cards come in. They re specifically designed to offer the benefits of credit cards to those who couldn t otherwise get them. There are no credit checks associated with getting a prepaid card. There aren t even any inquiries made of ChexSystems, an organization that keeps track of folks who have had trouble managing bank accounts such as creating excessive overdrafts or closing accounts that have negative balances. That means that even people who are denied bank accounts can get a prepaid credit card.

Clarifying a Couple of Points

There are a couple of often misunderstood conceptions regarding prepaid credit cards that warrant explanation:

  Prepaid Credit Cards are Debit Cards   Despite the name, a prepaid card is actually a special purpose, reloadable debit card. The card can only be used to pay for purchases, rentals and bills to the extent that funds have been deposited to the card account. No bank account is needed for this type of debit card.

  They Don t Help Build Credit   Since no money is ever loaned and paid back, potential creditors don t look on successful use as a measure of credit worthiness. Possessing and using a prepaid card isn t reported to the major credit agencies like, Experian, TransUnion or Equifax. Some prepaid cards make reports of bills being paid to a credit reporting agency called PRBC, Payment Reporting Builds Credit, but this doesn t affect the FICO score that is critical for obtaining future credit.

Benefits of Prepaid Credit Cards

  Make Purchases and Get Cash   Purchases can be made in stores or online just like with any other credit or debit card. There are, nonetheless, a couple of situations in which using these cards can be a bit inconvenient and we ll talk about them below.

  No Interest   With a prepaid card, purchases are made against money that has been deposited to the card account. Since no money has been loaned, there are no interest charges.

  No Debt   Since no credit has been extended, there s no danger of getting into debt. If there s an attempt to use the card for more than its available balance, the transaction will be denied.

  No Monthly Payments   With a prepaid card, the money spent has already been placed on deposit with the card so there simply isn t an issue of paying the bill. This also means there s no chance of late fees or over limit charges.

  Avoid Check Cashing Charges   For people without bank accounts, cashing paychecks or other checks can get really expensive. Taking advantage of the direct deposit feature of prepaid credit cards can all but eliminate this expensive hassle.

  Pay Bills Online   Online bill paying is one of the great conveniences of the digital age. You can use a bank account to make such payments but without an account, a credit card is a must.

 

The Occasional Obstacle

Prepaid cards generally can be used just like more traditional credit cards but there are a few exceptions to be aware of:

  Paying at the Pump   Yes, a prepaid credit card can be used to pay for fuel purchases at the pump. However, when a prepaid card is inserted into the pump, a temporary hold is put on the funds totaling more than enough to pay for the purchase. Since there s no way to know how much the purchase will be, it s typical for $75 to be tied up until the transaction is actually settled, at which point the remaining funds are released back to the account. This usually takes a few days. The situation can be avoided by paying the gas station attendant inside. That way, only the actual amount of the sale is charged.

  Renting a Car   Most car rental agencies will accept a prepaid credit card as payment and to reserve a rental. Generally, they will require putting the entire estimated rental charge plus 15% on hold on the card until the transaction is settled. The principle is essentially the same as when buying gasoline at the pump the final price isn t know until the rental contract is complete. Once settled, any unused funds are released back to the card. It s always best to check with the agency in advance to make sure that they ll accept the prepaid card.

  Reserving a Hotel Room   Stories of hotels not accepting prepaid credit cards are not uncommon. When making a reservation, it s a good practice to ensure that the prepaid card won t be a problem. Presuming that the card is accepted, it s customary for them to place the entire estimated charges plus 15% on temporary hold on the card just like with car rentals.

How to Get a Prepaid Credit Card

Getting a prepaid credit card is easy. Websites for the cards universally advertise 100% approval. The only requirement is providing valid identification data. That s required by the USA Patriot Act to put a roadblock in the path of the bad guys out there. Applying for a card only takes about a minute s time online or you can visit one of the sales agents that are identified on any of the card sites. Those agents are available in thousands of retail stores including Wal-Mart, K-Mart, most chain grocery stores and pharmacies, convenience stores and many other retailers. In large stores they re generally located at the customer service counter while in smaller locations they re at the check stand.

When you apply for a card in person, you ll get a temporary, non-personalized card that can be used just like the permanent card but with some stricter dollar limitations. Either way, you ll receive the permanent card in the mail within 7-10 days.

Loading Funds to a Prepaid Credit Card

Making use of a prepaid requires making deposits to the card account, often referred to as loading, reloading, charging or recharging the card. There are several methods of making these deposits.

  Direct Deposit   The most advantageous way to add money to a prepaid credit card account is through direct deposit of recurring payments like paychecks or government benefits like welfare or social security payments. Tax refunds can also be deposited directly to the card. Participating in a cards direct deposit feature is free of charge and, with many cards, reduces or eliminates other fees such as the monthly service charge or customer support fees. Direct deposit is also the feature that makes check cashing fees a thing of the past for those who don t have bank accounts.

  Transfers from Bank Accounts   Funds can be transferred from accounts in nearly all financial institutions such as banks and credit unions. The card issuer doesn t usually charge a fee for this type of deposit but the bank likely will require one.

  Cash Deposits   Cards can be loaded with funds through the same agents that sell them in retail outlets. Deposits can also be made with agents of Western Union, MoneyGram, Green Dot and similar companies. The agent is free to set the fee but it generally ranges from $3.50 - $5.00. Such agencies are easy to find on the card s web site. Cash deposits can also be made to some cards via PayPal.

Prepaid Credit Cards can be of great value for consumers who aren t eligible for more traditional credit cards and they even fill a gap for those who have been denied bank accounts. Though the services provided by most of the cards are similar, the fees charged can vary widely. No one card is best for everyone s need so it s important to compare the costs and benefits to your own unique needs. For side-by-side comparison of these cards, consult our Prepaid Credit Card Review matrix. For more details of the best of the prepaid cards, read our objective reviews of BankFREEDOM, AccountNow and READYdebit Visa. At TopTenREVIEWS, We Do the Research So You Don t Have To. 

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