What is a prepaid credit card?

There is some confusion among consumers as to what a prepaid credit card is. A prepaid credit card will usually have a credit card symbol on it, such as MasterCard or Visa. Additionally, the card will have a 16-digit account number and look almost exactly like a regular credit card. However, that is where the similarities between the two types of cards usually end.

In reality, a prepaid credit card is more closely related to a debit card than a true credit card. A debit card by its very nature is deducting money from a positive balance in account. A true credit card is actually extending a loan to the consumer at the time of purchase for the item. This means that the person may or may not have the cash in their account to pay for this purchase. This is true even for a secured credit card, where the balance in account is there as security not an actual payment for purchases. It is critical for a person to understand the difference between these systems. Therefore, when you purchase an item with a prepaid credit card, you are actually purchasing that product with the money deposited into that prepaid credit cards account. This is why it is closely related to a debit card. It is possible that you may sign for a prepaid credit card, but that does not mean that you are buying the product on credit. In this situation, your signature is acting the same as a pin number on a debit card.

With the understanding that a prepaid credit card is not the same as a true regular credit card, then it is easier to understand how a prepaid credit card actually works. With a true credit card, the bank will be receiving its income based on the interest rate charged for the credit purchase. It is true that most credit cards do have certain fees associated with the card; however, the main source of revenue from a credit card is the interest rate charged. With a prepaid credit card, the issuing company makes its money by the fees associated with the prepaid credit card. This is one of the main reasons that prepaid credit cards have a wide variety of fees associated with the card. Additionally, these fees may add up very quickly, thus decreasing the total amount available for use by the consumer. It is critical to realize that these fees may quickly decrease the account value of the prepaid credit card, as most consumers are caught by surprise by the total fees associated with prepaid credit card.

Typical fees associated with a prepaid credit card

As stated prepaid credit cards are often burdened with numerous fees, which are paid directly to the card issuer. The wide ranges of fees available to an issuing company are significant. Many prepaid credit cards will charge for an issuing of the card fee, reloading fees, ATM fees, balance inquiry fees, and even fees if the balance goes to zero. Besides these general fees, some credit card companies will add a monthly maintenance fee. Thus, it is possible that a prepaid credit card may be very expensive without using the card to make a purchase.

The first fee that most people will pay for a prepaid credit card is the one time setup fee. This fee is paid at the moment the prepaid credit card is purchase or opened. These fees are unregulated and can vary from card to card, so consumers should examine these fees to find the best possible deal.

Once the account is active and opened then the prepaid credit card may be used for any purchases. This is one of the benefits of a prepaid credit card, it is available to use at any company, which accepts credit cards. Many of the companies, which issue prepaid credit cards, will charge a monthly maintenance fee. It is critical for consumer to understand if their prepaid current card has a maintenance fee. Some fees may only become active if the balance of the credit card falls below a specific point, while others may become active as soon as the card is opened. Thus, it is possible that your prepaid credit card to be less than the amount deposited into the account. For example, if you buy a prepaid credit card with a balance of $100 and a monthly maintenance fee of $5, if you do not use this credit card for two months the balance available will only be $90.

Often prepaid credit cards will charge you a specific fee if you try to use it for cash out of ATM. The fees will vary from company to company, but could be as high as $3 to $5 or more. Additionally, many other companies will charge to add more money to the account. Thus, if you add $100 to your prepaid credit card to increase the balance by $100, the total cost may be $105 as an example.

Some companies will charge you fees on your prepaid credit card to inquire with the current balances online. Therefore, if you use a computer to see how much of a balance you have on your account, the company may charge you a small percentage of the account balance as a fee for this inquiry. Other companies may actually charge a fee for when the account balance goes to zero. Thus, if you buy a product for $100 and your prepaid credit card has a balance of $50, with you paying $50 in cash for the product you may actually have to pay a fee for the account balance going to zero dollars. In this example, you may actually have to pay $51 in cash for the product, with one dollar representing the balance fee charge by the prepaid credit card company.

Where to find a prepaid credit card and smart use of the card

Most prepaid credit cards can be found in any store. Often they are found in the checkout lanes or near the checkout lanes and are conveniently placed to be bought like a gift card. They do provide a convenience to people as often these cards can be used at any store, where a gift card can only be used at the issuing store. However, as a consumer one should use smart strategies to protect their investment with a prepaid credit card. Thus, one of the best uses of a prepaid credit card is to use it right away. This can help you to decrease the overall cost of a prepaid credit card, as if the company charges a maintenance fee, by using it right away you can forgo having to pay this fee.