What Are Prepaid Cards, How Do They Work?

Prepaid cards may be used to make purchases much like debit cards. A prepaid card, on the other hand, has a balance that serves as a spending limit. Once the balance is depleted, the card becomes inoperable until you replenish it.

Read on to find out what prepaid cards are and how they function so you can decide if they're good for you.

What Is a Prepaid Card?

Let's start with the fundamentals. Prepaid cards are known as pay-as-you-go or stored-value cards. However, the fundamental premise stays the same. You purchase a prepaid card and then use it to make purchases.

Prepaid cards are often available at banks or retail establishments such as grocery shops and drugstores. They feature either a set available balance or the option to add money to the card. The card can then be used until the balance is depleted. You won't be able to make any additional purchases until you reload the card. A prepaid card acts similarly to other types of cards. This means you may swipe or enter it into point-of-sale systems to make purchases and, in certain situations, withdraw cash from ATMs.

But why would you bother with all of this when you can just use cash, debit, or credit cards? A prepaid card might be useful in the following situations:

prepaid card

Not wanting to carry cash- A single card may be more convenient to carry than a bunch of dollars. You may also find it to be a more secure alternative to cash.

You want an extra layer of protection- While a stolen prepaid card may be simple to use, the thief will only have access to the card's balance, as opposed to a debit card that permits them to overdraw their account.

You wish to control your spending- A prepaid card might assist you to avoid spending more than the card's available amount.

You require an alternate checking account- If you don't have a bank account but want the convenience of using a card instead of cash, a prepaid card is an option.

You don't want your credit score to a suffer-A credit check is not required to obtain a prepaid card. As a result, it might be a useful short-term credit card option.

How to Add Money to Prepaid Cards?

If you spend the balance on a prepaid card, you must replenish it if you wish to continue using it. There are numerous approaches to this:

  • Transfer funds from a checking or savings account to the card.
  • Deposit funds to the card from paychecks or other recurring sources of income.
  • At a retail outlet, reload the card with cash.
  • Purchase a reload pack to load a certain amount of money onto your card.

Prepaid Cards vs. Debit Cards vs. Credit Cards

Prepaid cards differ from debit cards in that they are neither linked to a bank account, as debit cards are, nor are they linked to a line of credit., as a credit card is.When you use a prepaid card, you are just spending the money that has been loaded onto it. You are not borrowing money, and the card has no access to any of your other bank accounts.

That is why, if you wish to continue using an empty card, you must reload it with new money.

Do Prepaid Cards Help You Build Credit?

prepaid card

Prepaid cards, according to the Consumer Financial Protection Bureau (CFPB), will not help you improve your credit history.A prepaid card does not represent a line of credit, and you are not borrowing money when you use one. This implies that your prepaid card activity is not reported to credit reporting agencies and has no effect on your credit score.

If you want to develop credit, you should apply for a typical credit card. If that isn't a possibility, there are alternative methods to start building credit from scratch, such as becoming an authorized user or applying for a secured credit card.

Using a credit monitoring program like CreditWise from Capital One is one method to keep track of your score. It displays critical elements that may affect your TransUnion VantageScore® 3.0 credit score. You'll also receive email notifications when something significant happens on your TransUnion credit report, among other benefits.CreditWise will not hurt your credit score if you use it to monitor it. It's also available to everyone, not just Capital One customers.

Prepaid Card Restrictions

While prepaid cards might be useful in some instances, they are not without limits.

  • Withdrawing funds
  • Buying things
  • Adding funds to your card
  • Checking your card balance Contacting customer support
  • You are not using your card.
  • Making international transactions
  • Using your card on a monthly basis

Prepaid cards may also have fewer safeguards than standard credit or debit cards. The government has made measures to offer legal rights for prepaid cards, such as a means to restitution if your card is lost or stolen. However, these safeguards may fall short of those provided by regular credit or debit cards.

For example, to receive support from your card provider, you may need to register your card. There is also a time restriction for challenging charges. After then, you may be held accountable, even if fraud was involved.

Alternatives to Prepaid Cards

Do you want to improve your credit score? A secured credit card might be a viable option. Even if your credit score is in the terrible or poor category, a secured card may be a choice to help you develop credit via responsible use.

Are you thinking about getting a prepaid card?

Prepaid cards have limits and are not intended to help you establish credit. However, they can provide an easy means to make cashless payments and may even be helpful in the proper situations.