What is a Prepaid Credit Card?

While many people are rejected when applying for a credit card due to a less than perfect credit score, credit cards are often needed when making certain kinds of purchases or transactions.  Rental cars, hotel reservations, purchases online etc, often require the use of a credit card.  In these and other situations when standard credit cards aren’t available, consumers can turn to prepaid credit cards which are also known as secured credit cards.

Much like a credit card, yet prepaid credit cards have credit limits generally lower than a regular credit card,  and the credit limit is based on a deposit account that a card holder has opened and into which they have deposited funds.   In that manner a prepaid card is much like a debit card.  Each time a transaction is made, the amount of the transaction is deducted from the balance of the deposit account.

Many people are rejected after filling out a credit card  application because of poor credit. The problem with this is that a major credit card is often needed for important business transactions like making hotel or airline reservations. Credit cards  are also necessary when placing online or phone orders. For those with bad credit, prepaid credit cards open up the possibility of engaging in these transactions. These cards also may be used by parents that want to give their children credit cards to use while limiting their purchase power.

Also known as a secured credit card, a prepaid credit card is much like a regular credit card, only the credit limit is generally lower than a regular card and that credit limit is based on a security deposit that the account holder must make in order to use the card. A prepaid credit card is different than a prepaid debit card in much the same way that a regular credit card is different than a regular debit card — a prepaid debit card deducts funds from the amount of money deposited into the account associated with the card whereas a prepaid credit card makes purchases on credit.

Because of the deposit account, the card holder doesn’t need to worry about payments, late fees, or interest., but prepaid credit cards typically come with various fees which compensate the card issuer for their services. 

Good Credit Sense:

Prepaid cards are a great way to build up credit and demonstrate consistent use of a credit card, but  be sure that your prepaid card is reporting to a credit agency!