Prepaid Credit Cards

Prepaid Debit Cards are Not Prepaid Credit Cards. In fact, the term “prepaid credit card” is an oxymoron—or a contradiction. Credit cards provide consumers with a line of credit and charge a finance charge for any purchases or cash advances that are made with the card and are not paid back within one billing cycle—typically a month. How high the finance charges can go depends on what card program you select. Leaving a balance owed on a credit card is essentially creating debt that does not have to be paid back in fixed installments but rather “revolves” like a revolving door, as payments to the debt are made and new debts are added to the credit card.

In contrast, prepaid debit cards or “prepaid cards” can be used much like a credit card for shopping online or in person, because they are issued by a bank, like a credit card, and carry most often a Visa or MasterCard logo. The difference is that you are putting your own money on the card and then withdrawing funds as you make purchases with the card. You are prepaying with money up front. Because the money is already sitting in your card account, you are not borrowing money or using credit. And you will avoid any finance charges. You also have the option of selecting whether you want to make a purchase as a signature transaction or as a PIN debit transaction, which allows you to get cash back at the point-of-sale or at an ATM. Additionally, if you try to make a purchase that is more than the available balance on the card, the transaction should be rejected, so you cannot be overdrawn or be hit with overdraft fees. (But be sure to choose a prepaid card program that does not allow you to create a negative balance, because not all prepaid card programs are alike).

Unlike one-time-use prepaid gift cards, reloadable prepaid cards with the Visa or MasterCard logo are designed for repeated use, allowing you to replenish the balance on the card. They are a good choice for people who cannot get a checking account and thus a checking account debit card. They are also a good choice for people with bad credit who have trouble getting a credit card. “Secured credit cards” are another form of credit and are also not prepaid credit cards or prepaid debit cards. They require you to deposit your own money with the card account in order to borrow money against the deposited funds (with potential interest), which remain unavailable to you until you pay off any credit balance and close out the card account.