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Prepaid credit cards function like debit cards but aren’t linked to a bank account — instead, you load funds onto the card in advance and spend only what’s available. They’re a convenient tool for budgeting, travel, and online purchases, offering protection against overspending and fraud without requiring a credit check or incurring debt.However, prepaid credit cards have disadvantages, as well. Most notably, they won’t help you build your credit score.Keep reading to learn more on prepaid credit cards, including how they work, pros and cons, different types of prepaid credit cards, and more.
Prepaid Credit Cards, Defined
A prepaid credit card, also sometimes known as a prepaid debit card, is a type of card onto which you load a specific amount of money that you can then spend. Some cards allow you to reload money multiple times.Because a prepaid credit card is linked to cash you already have, it’s not a loan or extension of credit. This means you don’t have to worry about credit card interest charges. However, you also don’t get the opportunity to build your credit, which is one of the plus sides of traditional credit cards if they’re used responsibly. Additionally, some prepaid credit cards come with high fees or long waiting periods before you can access the money you load onto the card. As with any financial product, it’s important to make sure you know exactly what you’re signing up for so you don’t find yourself in a sticky situation after the fact.
How Prepaid Credit Cards Work
The way prepaid credit cards work is pretty simple: you choose a card with terms you like, load money onto the card (usually via direct deposit, bank transfer, or in cash), and then use the money to make everyday purchases.In the process, you may be responsible for activation fees, monthly fees, ATM fees, inactivity fees, and other costs. It may also cost you money to load the card with cash at retail cash registers.Recommended: How to Transfer Money From a Bank Account to a Prepaid Card
Pros and Cons of Prepaid Credit Cards
There are both pros and cons to prepaid credit cards. They can be an excellent alternative to credit cards for students, who might still be learning about responsible financial habits. They can also be a good option for those who don’t have or qualify for a bank account, since in many ways they operate like a debit card (though just not connected to a bank account).Prepaid cards do have some drawbacks, as well. A regular credit card is reported back to the credit bureaus — and your on-time, in-full payments can help build your credit score over time. With a prepaid credit card, your credit score won’t get any boost.Here are some additional pros and cons of prepaid credit cards at a glance:
Pros of Prepaid Credit Cards
Cons of Prepaid Credit Cards
• No risk of going into debt or accruing interest charges
• No opportunity to build your credit score with good card behavior
• No credit check required to qualify
• Fees may add up
• More secure than carrying cash
• Depending on the type of card and whether you register it, they may not be accepted everywhere
Different Types of Prepaid Credit Cards
While there are dozens of prepaid credit cards on the market, they fall into two major categories:
Open-loop prepaid credit cards are those that can be used just about anywhere cards are accepted. These cards are branded with the logo of a major card issuer, like Mastercard or Visa.
Closed-loop prepaid credit cards are those designed to be used only at a certain store or family of stores.
For most, an open loop prepaid credit card is the better option, though it’s still important to understand that you might run into issues when attempting to make certain transactions with a prepaid card, such as reserving a rental car. Since rental car companies usually put a large hold on your credit card (in case of damage to the vehicle), there’s a chance you may also be required to put down a cash deposit if the amount on your prepaid credit card is less than the damage deposit.It’s also possible that the rental car company — or any other business, for that matter — may categorically refuse to accept prepaid credit cards. Ideally, you don’t want your prepaid card to be your only spending option. Recommended: Guide to Getting a Credit Card for the First Time
Choosing a Prepaid Credit Card
As with any credit card, when it comes to prepaid credit cards, picking a good card requires some research. You want to ensure you’re getting the card that’s right for you, especially since some cards may cost you more in fees in the long run.Additionally, you want to get a prepaid credit card that’s accepted by as many vendors as possible. The whole point of having a prepaid card is to use it, after all.Here are some questions to consider when you’re shopping for a prepaid credit card.
Do You Want an Open- or Closed-Loop Card?
As mentioned above, chances are you want an open-loop prepaid credit card that can be accepted by the majority of retailers. Look for a card that’s issued by a major brand, such as Mastercard, Visa, Discover, or American Express.
How Do You Add Funds to the Account?
It’s also important to scope out how you’ll add funds to the account, as different prepaid cards have different policies and requirements. For example, you may be able to initiate a bank transfer or direct deposit — but if you don’t already have a bank or a job that offers direct deposit, that probably won’t be much use to you.You may also be able to load cash onto the card or cash a check onto a prepaid credit card, but keep in mind that some prepaid cards charge fees for this.
What Are the Fees?
They may not be charging interest, but prepaid card issuers are generally still interested in earning money. Often, you’ll find yourself on the hook for miscellaneous fees when opening a prepaid credit card account. Common fees to watch out for when opening a prepaid credit card include:
Activation or purchase fees
Monthly maintenance fees
Inactivity fees
Reload fees
Card replacement fees
ATM fees
Overdraft fees
Customer service inquiry fees
If you do find a card that doesn’t assess many (or any) fees, it’s still important to read the fine print. For example, you may be able to skip out on monthly fees, activation fees, or fees to reload your card with cash, but you’ll have to pay a fee if you want to make a mobile check deposit.Recommended: Guide to Opening a Bank Account Online
Common Prepaid Credit Cards
While there are many prepaid credit cards on the market right now, here are a couple of the most common.
Visa Prepaid Cards
Visa offers a variety of prepaid card products, including the Netspend® Visa® Prepaid Card and the Green Dot® Prepaid Visa® Card, neither of which assess an activation fee if you sign up online.
Mastercard Prepaid Cards
Mastercard also offers a suite of open-loop prepaid credit cards, such as the H&R Block Emerald Prepaid Mastercard®, which allows you to manage your funds from a convenient mobile app, as well as their own version of the Netspend Prepaid Card, which doesn’t carry a minimum balance requirement or any activation fees.
American Express Prepaid Cards
American Express offers several prepaid credit cards. One of the Serve® American Express® Prepaid debit cards allows you to do cash reloads for no fee, while another offers the chance to earn cash back.
Prepaid Credit Card Alternatives
While prepaid credit cards do have their uses, there are also alternatives to consider.For example, if you’re really hoping to get started on building credit with a credit card, but your credit isn’t strong enough to qualify for most traditional cards, you might think about opening a secured card. Like a prepaid credit card, you’ll have to put down some money up front for a secured card — but unlike a prepaid credit card, a secured card does actually offer you a line of credit; the money is just a deposit. That means you’ll have the opportunity to build your credit by using a secured card (though like a regular card, you can also accrue interest charges and go into debt). You can compare credit builder credit card options to find one that suits your needs.Other alternatives to prepaid cards include:
Money orders
Debit cards linked to a bank account
Cash
The Takeaway
Prepaid credit cards can be a helpful tool for those who need access to plastic without a bank account or the potential to go into debt. However, they can’t help you build your credit score, which is important for accessing loans and lines of credit. Upgrading to a secured credit card, or a card specifically built for applicants with lower credit scores, could help you get the financial access you need while also potentially helping you build credit over time.If you feel ready to start building your credit history, it’s important to shop around and consider interest rates and fees before applying. Fortunately, Lantern by SoFi makes it easy to compare cards, so you can quickly and conveniently see all your options.
Frequently Asked Questions
Is a prepaid credit card a good idea?
How do you get a prepaid credit card?
Can a prepaid credit card help build credit?
Photo credit: iStock/Eva-Katalin
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About the Author
Jamie Cattanach
Jamie Cattanach is a full-time freelance writer whose work has been featured at CNBC, Yahoo Finance, The Motley Fool, the Huffington Post and other outlets. At SoFi, she writes about investing, retirement, student loans and how to get your money right -- no matter what that means for you.
