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How Does a Prepaid Credit Card Differ from a Debit or Credit Card?

While it’s called a “credit card,” this particular piece of plastic actually functions more similarly to a debit card, as you’re only using your money to make purchases.

May 26, 2021

Credit cards and debit cards really can come in handy when you want to lighten your wallet, make purchases online or track your recent purchases. If you’re struggling to gain access to a credit card or debit card, you may be looking for a different way to take advantage of the perks of plastic over cash. Enter — prepaid credit cards. 

Not sure what a prepaid credit card is? Keep reading for answers on:

  • What is a prepaid credit card? 
  • How do prepaid credit cards work?
  • Do prepaid credit cards build credit?

What is a Prepaid Credit Card?

So, what is a prepaid credit card and how do prepaid credit cards work? 

A prepaid credit card is essentially a credit card you buy preloaded with money on it, or you add money to it. You can only spend the amount of money that is loaded onto the card. While it’s called a “credit card,” these cards function more similarly to a debit card, as you’re only using your money to make purchases. Except, prepaid credit cards can come with high fees, which debit cards typically don’t have. 

In some cases, you’ll hear a prepaid credit card referred to as a prepaid debit card or a stored-value card. These cards typically look just like normal credit cards and often come with a major credit card issuer logo, like Visa or MasterCard, on them. 

You don’t need a bank account to get your hands on a prepaid credit card. Instead, you buy prepaid credit cards from a company or store. In some cases, you buy cards for a set amount, such as $100, and then can only use it for that $100 value. In other cases, you can buy a prepaid credit card and continuously reload it. 

You can use prepaid credit cards to make purchases in stores or online, or you can use one to take money out from an ATM. Once you spend all the money on the prepaid credit card, it stops working unless you add more money to it. 

How Do Prepaid Credit Cards Differ From Debit and Credit Cards?

Prepaid credit cards overlap with debit and credit cards in some key ways but also differ from each of these options. 

As mentioned, a prepaid credit card works similarly to a debit card. The main difference being that instead of the card being linked to a bank account, you prepay the credit card by adding your own money to it. In both cases, you use your own money instead of borrowing it with a traditional credit card, but with a debit card, you pay as you go, not in advance. 

With a prepaid credit card, you are spending money that you loaded onto the credit card. Unlike a debit card, you cannot overdraft on purchases with a prepaid card. These forced limits can be helpful for those who struggle to keep track of how much money they have available in their bank account to spend and tend to run into pesky overdraft fees. 

A prepaid credit card may sound and look like a credit card, but with a prepaid credit card, you’re acting as the lender when you add money to the card to use at a future date. You also don’t tend to get offered the same cardholder perks, such as travel points and cash back, using a prepaid credit card instead of a normal credit card. 

What Are the Benefits of Using a Prepaid Credit Card?

There are a few benefits associated with using a prepaid credit card that may appeal to some consumers.

Convenience. A prepaid card provides an easy way to make purchases in person without carrying cash or online — when you may not feel comfortable using a debit card. 

No bill. There’s no need to worry about an unexpectedly high bill coming your way at the end of the month as you pay to use a prepaid credit card upfront. 

Easier to obtain. If you’re struggling to secure a normal credit card due to lack of banking access or poor credit history, you don’t need a bank account to get a prepaid card or a strong credit history. 

Budget-friendly. If you’re mindful of fees, a prepaid credit card can help you stick to a strict budget as you won’t be able to spend more money than you loaded onto the card. 

What Are the Downsides of Using a Prepaid Card?

Of course, some downsides can come with using a prepaid credit card that you may want to consider carefully before purchasing one. 

High fees. Many prepaid credit cards come with very high fees that might kick in when you activate your card, add money to it, make a purchase, check the balance, or use an ATM.

No credit building potential. One of the biggest questions consumers have about these cards is, do prepaid credit cards build credit? Unfortunately, they generally do not. 

How Do I Choose a Prepaid Debit Card?

Before choosing a prepaid credit card, it can be helpful to shop around to get the best deals. Remember, these cards can have pretty hefty fees, so you’ll want to do your research to make sure you’re paying as little to use your prepaid credit card as possible. 

When considering your options, map out how you’ll use your prepaid card and try to nail down what fees you’ll most often incur. For example, if you never plan to use an ATM, you don’t need to worry about ATM fees. Try to estimate how much you’ll pay in fees before making a final decision on which card to use. 

You can buy prepaid credit cards at many retailers like grocery stores and drug stores and over the phone or online. Some banks and credit unions offer these cards as well. 

What is the best prepaid credit card? That depends on your needs, the features you’re looking for and the fees. 

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How Do I Decide If a Prepaid Credit Card Is Right For Me?

Deciding if a prepaid credit card is right for you depends on what other financial tools are available to you. Because prepaid credit cards can be expensive to use, you’ll want to compare your prepaid credit card options to your debit card and traditional credit card options. 

Make a list of all the financial tools available to you and compare:

  • Fees
  • Credit building potential (like with credit cards)
  • Interest rate on deposits (such as when you add money to a checking account so you can use a debit card)
  • Cardholder perks (like travel points or cash back)

A prepaid card isn’t the right fit for everyone but based on your needs; it could be a good fit to help you stay within budget or speed up transactions. Before purchasing a prepaid card, consider if its benefits and drawbacks fit your budgetary needs.  

Is credit card debt weighing you down or making it harder to take out new credit cards at fair rates? Work with Tally to reach your debt-free goals faster.

 


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