Top Four Questions and Answers About Prepaid Credit Cards
Prepaid credit cards are a convenient option for many people. Still, there is sometimes a lot of confusion about what these cards are and what they are not. Below are three of the most commonly asked questions about prepaid credits cards.
Can They Be Used Everywhere a Traditional Credit Card Can Be Used?
One of the best features of prepaid credit cards is that they can be used in most of the places that you can use a traditional credit card. One of the ways these cards come in so handy is for those who want to be able to shop online yet are unable to obtain a credit card.
While prepaid credit cards can be used in most places, there are a few exceptions. For example, some car rental companies and some hotels will not accept the cards. This is a decision made by certain hotels and car rental agencies and is not due a difference in the features of the card.
Will These Cards Help to Improve My Credit Score?
Many people mistakenly think that a prepaid credit card can help to boost their credit score. Unfortunately, this is not true. While a traditional card is based on an amount of credit that has been extended to you and that you promise to repay, no such credit is extended for a prepaid credit card.
While there are some important differences, prepaid credit cards work more like a gift card. You pay cash to put a set amount of money on the card. You can then use the card until all of that money has been spent.
Because no credit is extended, there is nothing to report to the credit bureau and, therefore, there is no impact on your credit rating.
Do I Have to Pay Interest on Purchases?
Purchases made with a prepaid credit are not subject to interest. The reason is the same for why the cards do not help your credit score: no credit is extended. Instead, you are simply spending money that you have loaded onto the card.
While you do not have to pay interest, there are often fees in place for prepaid credit cards. These could include a flat monthly fee as well as a per transaction charge. The amount of these fees vary greatly, so be sure to shop around for the best deal if you are looking for a prepaid credit card.
Is a Prepaid Card the Same as a Secured Card?
While the cards are similar in some ways, a secured card is not the same as a prepaid card. One of the important differences is that with a prepaid card you load money onto a card and that money is what you spend. No credit is extended. With a secured card, you place a set amount of money into an account to which you have no access. The credit card company then extends you a line of credit based on the amount in the account.
Because a secured card does involve an extension of credit, the issuer of a secured credit card will usually report the activity to the credit bureau, which can help your credit score if you use the card wisely. As discussed above, a prepaid credit card will have no impact on your credit score.
Another very important difference is that purchases made with a secured card will accrue interest. Often, because these cards are issued to those with less than perfect credit, the interest rates can be quite high. A prepaid card does not charge interest on purchases.
After reading the answers to some of the most common questions about prepaid credit cards, you should be better equipped to decide if the cards are the right choice for you. For many, they provide convenience and the ability to shop online safely. For those wishing to rebuild or establish credit, they are not the right choice.
If you do decide to obtain a prepaid credit card, remember that not all cards are the same. You must be sure to shop around so that you can find a card with low fees and key features that are important to you.
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