In the personal finance world, there seems to be no end to the different products that are available, both credit-related and money-related, that we can access and then use. However, our spending habits can easily become uncontrollable, especially with respect to credit cards. Given that credit cards are a form of revolving debt, where the credit limit resets every month, it can be tempting to simply pay the minimum monthly fee, while accumulating a large balance that we are not able to to repay. Even some rewards cards, which may have an annual fee of over $ 100, are free for the first 12 months after the card is activated. Another scheme that can lead a consumer to debt if he has not thought about his decision correctly.
This is where prepaid credit cards tend to come in, or at least this is one of the reasons why some consumers choose a prepaid card instead of a traditional card. In fact, there are several reasons why prepaid credit cards can be both good and bad, and in the following article, we’ll explain why.
What is a prepaid credit card?
Before weighing the pros and cons of using prepaid credit cards, we must first know what they are. Unlike a traditional credit card, which will have a monthly credit limit, a prepaid credit card has a total monetary limit. Instead of this limit being reset at the beginning of each month, a prepaid credit card already contains a specific amount of money. If you spend this money, the limit will be reduced depending on the amount spent. The limit a prepaid card may hold depends in general on the policies of the company that issues it, but it can vary from a few hundred dollars to $ 15,000 in some cases.
Prepaid cards are usually purchased through the same traditional credit card companies, such as MasterCard or Visa, but it is also possible to sometimes obtain them as promotional products through intermediary companies and retailers.
How to use a prepaid credit card?
Someone who wants a prepaid credit card only needs to buy one through the credit card company of their choice, at the bank, over the internet or over the phone. Prepaid cards differ from ordinary credit cards in that they generally do not require credit or application verification. You just need to be 18 years old or older, unless your parents allow their bank to open an account, which is common. Parents will open a prepaid account for their children and introduce them to the idea of using credit while controlling their expenses.
A prepaid card works much like a gift card that you would buy from any retailer, but you can use anywhere. You pay a small fee for the card itself, then you can fill it as needed, to the limit you want. Prepaid cards look like cards from a typical checking account, rather than a credit card. If you decide to put $ 500 on the card, and then buy something for $ 200, you’ll have $ 300 left until you decide to fill the card again. Like a regular credit card, you can pay for things using the electronic terminal at merchants, restaurants, gas stations or wherever prepaid cards are accepted. You can also use it to buy things online or over the phone.
What is the difference between a prepaid credit card and a regular credit card?
Although prepaid credit cards are mainly sold by companies that are better known for their regular credit cards, the two types of cards are actually different in many ways. At first glance, prepaid cards may look exactly like regular cards, but the way they work is quite different.
For example :
- With an unsecured, regular credit card, you borrow money from your bank or other financial institution, which will have a partnership with a certain credit card company. A prepaid card contains only your money.
- With your usual credit card, you will have a balance to pay each month. If you are unable to pay the balance, a penalty will be charged. However, there will be a minimum payment you can make to avoid this penalty. Once you have paid your balance, your credit limit is reset. The only limit of a prepaid card is how much money you put on it.
- Many credit cards, regular and secure, have a certain interest rate, unlike prepaid cards.
- Any activity on your regular credit cards will appear on your credit report and will affect your credit score in various ways. Responsible use (paying your bills on time and in full, not exceeding your credit limit, etc.) will increase your credit, and any irresponsible use (late / short payments, etc.) will damage it. Prepaid cards have no effect on your overall credit because they are not credited at all.
- If your regular credit card is stolen, it is easier to cancel it, or even recover some of your money if the thief has spent it. On the other hand, with prepaid cards, it will be much harder to get your money back because it is already on the card and taken directly from your bank account.
- All credit cards, whether secure or not, have an expiration date (usually 1 to 5 years). When the card expires, a new free card will arrive by mail. You just need to call the credit card company later to reactivate it, which will probably be free too. Many prepaid cards also expire, as is the case with promotional prepaid cards during reward programs, however, the funds do not expire. Here you have to buy a brand new card and then pay again for the credit card company to transfer the remaining funds.
What is the difference between a prepaid credit card and a secured credit card?
Secured credit cards are actually more like prepaid credit cards than normal credit cards. For example, secured credit cards and prepaid cards are often offered to people with bad credit. Both types of cards also require you to put money as collateral from the start. With a prepaid card, you have to pay for the card itself, then add money on it before you can use it. Secured credit cards require a deposit before they are activated.
Once again, secured credit cards are different from property in ways:
Yes, secure cards are called “secure” because they require a deposit before being approved. However, this deposit will be placed in a separate savings account or a certificate of deposit. So, if the consumer sees himself in default of payment, the deposit is confiscated. If the credit usage trend is maintained, the credit card company can transfer the funds to an unsecured credit card, and the initial deposit will be refunded. When you pay for a prepaid card and then spend the money you put on it, your money just went away.
- Like a regular credit card, you will have a specific revolving credit limit that increases or decreases based on your expenses and payments. You will also have to make monthly payments, pay interest and penalty fees if you miss payments. None of this applies to prepaid cards.
- Responsible and irresponsible use will also affect your overall credit. Prepaid cards, no matter how they are used, do not affect your credit.
- Some secure cards, such as regular credit cards, have an annual fee. Prepaid cards have fees, but for different reasons (read on for more information).
- You will be offered the same services as for a regular credit card, such as unemployment, disability, etc. Since a prepaid card already contains your money, you will not have these offers.
The advantages of a prepaid credit card:
Prepaid credit cards have many benefits that make them attractive to some consumers. For example:
- You do not need to have a good credit to buy a prepaid credit card. If your credit is low, or if you do not qualify for a regular credit card for any reason, you should still be able to buy a prepaid card. There is usually no credit check performed considering you as a customer.
- You also do not need to apply for a prepaid card, as you would with a typical credit card.
- Prepaid cards can be distributed as gifts that everyone can use. Parents usually give them to their children for this reason.
- They have a specific limit that can be recharged at any time. This is a good way to ensure that the cardholder is going to get into debt too much.
- You will not have to worry about late fees, interest charges or monthly bills.
The disadvantages of a prepaid credit card:
Despite many remarkable qualities, prepaid credit cards, like any other type of financial product, also have some disadvantages:
- Prepaid credit cards generally have a number of fees specific to the brand of card used. These fees may include, but are not limited to: purchase and activation / reactivation fees, ATM withdrawal fees (in addition to what the machine charges), replacement fees (if the card is lost or stolen), reloading fees, etc.
- Although you can use a regular / secure credit card almost anywhere, many institutions do not accept prepaid cards
- Some prepaid cards can not be used outside of the country where they have been activated. So if you bought the card in Canada, you may not be able to use it in the United States. Be sure to check the cardholder’s agreement for policies such as: “Valid in Canada only.”
- If you spend all the money on the card, you will not be able to use it until you have recharged it. No revolving credit means no money in an emergency.
- Lost or stolen cards are difficult to exchange. Not only will you have to pay for a new card, but the funds already paid may not be recoverable. You must keep the card number somewhere, just in case. . With a regular credit card, the card issuer can either give you a new card with the same number, or a new card (if the card was stolen). If you do not have the number of your prepaid card and that it is lost or stolen, all that remains to you will be definitively lost.
- Unlike regular / secure credit cards, prepaid cards will not be rebuilt or affect your credit in any way. Since the card is based on money rather than credit, the card company will not report any activity to Canada’s credit reporting agencies (Equifax and TransUnion), so any responsible use will not improve your credit score. credit.
What type of consumer should use a prepaid credit card?
As mentioned above, there are certain types of consumers who can benefit more from using a prepaid credit card than from a regular or secure credit card. Since they are not really considered credit cards (just debit style cards issued by credit card companies), consumers with bad credit are one of the key groups for which these cards are intended. So, if you have a low credit rating and are having trouble getting a normal credit card, prepaid cards might be the right choice for you.
Prepaid cards can also be a good gift for a family member or loved one. The recipient can spend the money on what he wants and any additional charges will be removed from the card’s assets. Once the card is empty, they can simply disable it, then discard it or fill it themselves. They are also common among students, who need to pay for books and other supplies, while respecting a fixed limit.
However, if you are looking to build or improve your credit, a prepaid credit card is not the best choice. In this case, if you already have a favorable credit, a regular credit card will be more advantageous. If you have bad credit, using a secured credit card until you can convert it to an unsecured card will probably be the best option.
Always do good research and read all the fine print!
If you are considering buying a prepaid card instead of a typical credit card, be sure to be careful and consider all the factors in advance. Do some research before making a decision, this will help you make sure that the card company and the card itself are legal.