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Prepaid credit card

A prepaid credit card can be a great financial tool. Bankrate explains what it is.

What is a prepaid credit card?

A prepaid credit card is a type of credit card with a credit limit based on the account holder’s deposit. It works like a regular credit card, but instead of buying items through credit, account holders spend money that they have already loaded onto the card.

Deeper definition

Prepaid credit cards resemble standard credit cards, but they work like a debit card. Users have to front-load the card first before they can use it for purchases. Banks and other financial institutions issue the cards with the logos of major credit card companies, such as MasterCard, Visa or Discover. However, they sell the cards through independent companies.

Account holders do not have to worry about accruing debt or finance charges. What they have in their account is all they are able to spend. There is no due date or revolving balance to think about.

Since users are not borrowing money when they use a prepaid card, there are no finance charges or interest rates to consider. However, it doesn’t mean that using a prepaid credit card is free. Here are the common fees associated with prepaid credit cards.

  • Purchase and activation fees are one-time charges that can range from $0 to $30 or more.
  • Reloading fee is assessed for adding funds to the prepaid card account. It varies depending on the bank, from $0 to $5 or more per reload.
  • Monthly service, also called maintenance fee, can be as much as $9.95 per month, though some banks issuing prepaid credit cards don’t charge anything.
  • Declined transaction fee is charged if the user tries to make a purchase without sufficient funds in his account. Not all prepaid cards charge this fee, so look for one that doesn’t.
  • Transaction fees are charged for every transaction prepaid card users make, both online and over-the-counter. The same applies for withdrawals through ATMs. These will either be a percentage of what an individual withdraws, or a set charge.
  • Funds transfer fee is a fee charged for transferring funds to another account.
  • Inactivity fees are charged if an account is dormant for several months.

Prepaid credit card example

To open a secured line of credit, applicants should first look for a bank offering this service. Applicants may be required to pay an application fee and an annual fee. The amount that banks charge can vary widely, as do terms and conditions, so applicants should carefully research any prepaid credit card they are considering, along with the bank, and the contract.

Once approved, the user can often load or reload the card either through direct deposit, through the bank’s website, or simply with a banking agent in person, depending on the chosen card.

People with poor credit are often qualified for a prepaid credit card even when they may not get approved for a standard credit card. Thus, it is often used as a way of establishing positive credit. By making small charges regularly and paying them off every month, a borrower can show that he is financially responsible. In some cases, after several years of making regular payments, a secured account can be converted to an unsecured one.

Use our calculator to figure out how long it will take you to pay off your credit card debt.

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