What are prepaid credit cards?

If you've used a prepaid phone card or sim card before, then you already have a basic idea of how a prepaid credit card works. You just need to ?load? it with money and then use it as you would any regular credit card. It can be used to pay your purchases at any store and is also accepted for many online transactions. You may also withdraw cash from any ATM.

Essentially, a prepaid credit card functions as a debit card, except that a prepaid credit card is a separate account. A debit card is linked to either a savings or a checking account. You just need to open a prepaid credit card account and deposit money, just like you would with a regular bank account. After you pay the fees, which could amount from $5 to $50, the bank then issues you a prepaid credit card.

Many banks offer prepaid credit cards under Visa or Mastercard. Other providers include Western Union, Greendotonline and Rush Card. Prepaid credit cards can also be purchased at selected stores, malls and even gas stations.

Where's the credit?

The term ?prepaid credit card? is probably a misnomer because there's no credit involved when you use it in any transaction. With a credit card, you pay with the money you don't yet have, but which your banker or credit card company guarantees for you.

With a prepaid credit card, you only spend the money you loaded the card with. For example, if you have $300 on your prepaid credit card, you can't purchase a $325 item. It's that simple.

Who can use a prepaid credit card?

A prepaid credit card is a good tool to help you curb your shopping expenses. It is also a good alternative to a regular credit card that you didn't get due to bad credit or for any other reason. A prepaid credit card lets you enjoy the usage benefits a regular credit card can offer.

Advantages

Spending limit ? a prepaid credit card will only allow you to spend the amount that is left on your account, nothing more. You don't have to go beyond a credit limit because the only limit you have is self-imposed. If you load just $500 on your prepaid credit card account monthly, that's the amount you'll get to spend, until the next time you load it again.

Absence of debt ? regular credit cards let you ?charge? purchases and then pay them back at a later date in full or make a minimum payment with interest. Every time you use a credit card, you incur a debt. With a prepaid credit card, you don't charge purchases, but pay for them outright, on cash basis. You also do not have to worry about monthly billing statements.

Fast processing ? you're not required to undergo a credit check and there is no waiting to get your prepaid credit card approved. There is also no age limit.

Disadvantages

Spending limit ? the advantage of a prepaid credit card is also a disadvantage. While regular credit cards allow you to buy large purchases (such as appliances and furnitures), a prepaid credit card limits your buying power to the amount currently deposited in your prepaid account. Once it's gone, you can't buy more until you deposit money into that account.

Fees ? each time you make a deposit to your account, you pay an additional but nominal fee. Some prepaid cards also charge you a minimum fee for every transaction.

Limit of use ? you can't use a prepaid credit card to pay regular automatic payments and some smaller retailers don't accept transactions made with prepaid credit cards. A prepaid card will also not help you establish your credit, much less rebuild it.