loading, one second please...

Prepaid Credit Card Isn't That An Oxymoron?

Joan Young By Joan Young on
Badge: Editor | Level: 34 | Finances Expertise:
if it's plastic is it a credit card?

Is a prepaid credit card the same thing as a debit card? Can it be used to help repair a credit rating?

People with damaged credit who cannot be approved for a credit card find it impossible to do such simple things as place orders on-line or over the phone. Making hotel reservations or renting a car are out of the question.

The type of card known as a prepaid credit card can solve some of those problems, but how can something for which one has prepaid have anything to do with credit? The truth is that in most cases prepaid credit cards really don’t have anything to do with credit, but there are some notable exceptions.

What is a Debit Card?

A debit card is a plastic card which looks about the same as a credit card but is funded by being linked to a bank account. Many of them carry the logo of a major credit card company which means that the company offers some security protection, and allows the holder to track transactions on-line.

A debit card frees a person from carrying cash, but there can be some drawbacks. Many banks charge hidden fees for processing transactions, and there can be stiff penalties for overdrawing the bank account balance. One practice, much in the news recently, is “overdraft protection fees.” This name makes it sound like one is receiving a great service, but the price can be high. Usually all this protection provides is that use of the card when there are insufficient funds will be covered (up to some limit), but you will still have to pay for the transactions and penalties for the mistake. Better to keep track of your balance! A $3.00 snack could end up costing $50 or more! Banks automatically enroll debit cards in this program. Check with your bank if you would rather just have the card denied when there are not sufficient funds to cover a purchase.

What is a Prepaid Debit Card?

A prepaid debit card is not linked to a bank account, but is loaded directly with cash. Think of it as a gift card that you have bought for yourself.

These kinds of cards are often called prepaid credit cards. This is confusing, because they are not a credit card at all, and they have nothing to do with credit. The only tenuous connection is that they may be issued through one of the major companies, and thus carry the logo of that company... in the same way as a bank debit card.

One advantage of this kind of card for some people is that they are not linked to a bank account. For those who are unable to get a bank account for whatever reason, a prepaid debit card can work. Depending on the company that issues the card there may be thousands of locations where cash can be added. This could be an advantage to someone who travels a lot and deals in cash income.

Cards like this may be accepted by more places than bank debit cards. They can be used to make on-line purchases, and purchases over the phone. Some hotels will accept them for reservations. There have been mixed reviews concerning the actual experiences of people who have them. At the worst end, some people ended up losing their money to sham card issuers. At the best end, they have worked well, and allowed people who are unable to obtain a regular credit card to use services that seem to require a credit card. One example involved a man who needed medical treatment for a child in a distant city. He was able to make a hotel reservation, and pay for expenses while in that city

One needs to pay very close attention to the terms of the card agreements, compare and choose carefully. Think about how easy it will be to add money to the card. Look at the fees associated with setting up the account and for adding money to the account. See if there is a way to track the transactions and balance.

One disadvantage of this kind of card is that it looks like a credit card, but it will not really get you the same service. Hotels may or may not accept it to make reservations. They will almost always put a hold on an amount of money which they estimate will cover your check-out bill. This can lead to funds being unavailable for other needs, especially if you have planned expenses tightly and need to use a card. Restaurants may do the same thing, especially for large parties. These holds are sometimes called “blocking.” If you use the card to make a reservation, and then pay by some other means, it may take days before the hold is released, effectively making your money unavailable to you.

Prepaid debit cards can not be used to reserve automobile rentals.

What is a Prepaid Credit Card?

If one assumes that there is another category, that prepaid debit cards and prepaid credit cards are not the same thing, then a prepaid credit card is one that can help you build or re-establish good credit.

There are apparently two options, one in the United States, and one in the United Kingdom, where the transactions made on a prepaid card are fed to credit agencies. The application fee for such a card is higher than for other cards, but it is possible that this might be one tool that could be used to repair a bad credit rating.

In the United States, several cards offer the “credit builder” service. Check the individual terms, but basically they automatically deduct a set amount ($30 or more) from the card each month and report that amount to TransUnion, Experian and Equifax, the credit reporting bureaus.

In the United Kingdom, the system is called Cashplus, and is similar with an amount withdrawn automatically each month of around 5 pounds. Successful withdrawal of this amount is reported to Experian.

Which Card Should I Get?

It is difficult to operate in the modern world without a credit card. For those who cannot qualify for a regular credit card, one of the other options may make it easier to complete financial transactions. However, it is wise to carefully compare the options, minimize fees and avoid penalties.