Why Use a Prepaid Card?

Why Use a Prepaid Card?

Are you the kind of shopper who likes the convenience of a credit card, but you don’t want to rack up debt? Then a prepaid card is just the ticket for your lifestyle. With a prepaid card, also called a prepaid debit card or pay-as-you-go card, you’re spending your own money, not borrowed funds from a credit card issuer. Read on and learn about these nifty plastic cards - what they're and how to get the most out of them.
If you’re wondering about why you’d want to use a prepaid card instead of a credit card, Finance Guru has the information you need.

What's a Prepaid Card?

You use a prepaid card to pay for goods and services. It has unique characteristics that set it apart from other cards. The price of the card reflects the card’s starting balance plus a purchase fee. For example, you can buy a prepaid card loaded with a $100 balance for, say, $104.95. The $4.95 is the purchase fee.

You can use the card just like a credit or debit card until you use up the balance. Many prepaid cards allow you to reload a balance, but others are one-time-use only. In any case, you pre-fund the card up front when you purchase it.

Unlike a credit card, a prepaid card doesn’t provide you credit to pay for your purchases. Instead, you’ve purchased the card balance with your own cash. That means you won’t face interest charges or late fees. Unlike a debit card, the prepaid card does not automatically draw funds from your checking account. Indeed, you don’t need to have a bank account at all. Unlike a one-time-use gift card, many prepaid cards are reloadable. There are several ways to reload your prepaid card:

  • You can set up an account with the prepaid card issuer and direct deposit money to the account. The card might allow you to transfer funds directly from your bank account

  • You can use a smartphone app linked to your prepaid card that allows you to photograph and deposit a check remotely

  • You can deposit cash at a retail store authorized to add money to the card

Once loaded, you can use the prepaid card to spend the balance for purchases or to withdraw cash from an ATM. That means you can use the card even if you don’t have a bank account. For most prepaid cards, you can’t spend beyond your balance, which means you won’t ever trigger overdraft fees.

However, some prepaid cards can be configured with overdraft protection that gives you access to additional cash once you deplete your balance. Note that many prepaid cards charge activity fees which you incur when you reload the card, use it to make a purchase, or withdraw funds. Some prepaid cards also charge a monthly maintenance fee. The issuer might waive the maintenance fee if you load a set amount each month.

Will a Prepaid Card be Accepted Anywhere Credit Cards Are?

Prepaid cards are associated with the major card networks (MasterCard, Visa, American Express and Discover). Therefore, they can be used just like a debit or credit card anywhere the card network is accepted.

Will a Prepaid Card Build Credit?

Prepaid cards won’t build your credit because they don’t provide credit. Therefore, the credit bureaus don’t track prepaid card activity. The flip side is that you don’t need good credit to get a prepaid card. That makes them an expedient choice for those with poor or no credit who don’t qualify for a credit card.

If you want to build credit, you might consider a credit builder account, in which you prefund a loan and pay it back monthly. You can also apply for a secured credit card in which you maintain cash in a special account that acts as collateral for your card’s credit line.

Can You Earn Rewards with a Prepaid Card?

Most prepaid cards don’t offer rewards, but there are exceptions. For example, the American Express Serve Cash Back Card is a prepaid debit card that pays 1% cash back on purchases, However, it charges a monthly fee of $5.95, so the card only makes sense if you spend substantial amounts each month.

Can You Convert Prepaid Cards into Credit Cards?

No, you can’t “convert” a prepaid card to a credit card. Remember, prepaid cards are favored by consumers who don’t qualify for a credit card and prepaid cards don’t build credit. So, there’s no pathway from prepaid to credit card. You might be able to load a prepaid card from a credit card, either directly or by cash advance. Of course, you’ll be paying fees for the prepaid card and you might incur annual fees and interest charges on your credit card.

Pros and Cons of Prepaid Cards

Prepaid cards are convenient, but expensive. Here is a summary of prepaid card pros and cons.

Pros

The pros include:

  • Good credit history not required: since you fund these cards up front, you don’t need to have a good, or any, credit history to get the card. You aren’t borrowing any money, so your credit scores aren’t checked when you buy the card. These cards are a workable solution if you want to live the no-debt lifestyle.

  • Checking account not required: want to avoid opening a bank account? You don’t need one to use a prepaid card. That means you don’t have to pay banking fees, although prepaid cards often have higher fees. If you fancy living off the grid, prepaid cards are perfect for your lifestyle.

  • Avoid the debt trap: perhaps you fear falling into debt by using a credit card. Perhaps you have good reason to have this fear. Since prepaid cards are prefunded, you won’t fall into debt by using these cards.

  • Privacy and security: prepaid cards are anonymous and often function as throwaway accounts. If you have reason to protect your privacy (and even if you don’t), prepaid cards are a secure solution.

Cons

Here are the cons:

  • High fees: although prepaid cards have improved over time, many still charge high fees. You might consider these fees as a substitute for checking account fees if you choose not to bank, but of course, banks provide many other services and offer saving accounts.

  • No credit building: as we’ve indicated, prepaid cards won’t build your credit.

  • Less consumer protection: check the card to see what happens if you lose it or if a fraudster steals the card number and drains your balance. If the issuer is not FDIC-insured, you might have no protection if the issuer goes bankrupt.