How Prepaid Credit Cards Work

It’s a given that a credit card is a necessity in today’s financial world. Renting a car, reserving a hotel room and booking airline passage are all but impossible without a card. Online shopping can often be done using services such as PayPal and TeleCheck but credit cards are more widely accepted. Even getting through the checkout line in a store is more convenient with a card than writing a check or sorting out cash.

Unfortunately, it’s also a fact that many people can’t qualify for traditional credit cards because of a poor credit history or no credit history at all. That’s where prepaid credit cards come in. They’re specifically designed to offer the benefits of credit cards to those who couldn’t otherwise get them. There are no credit checks associated with getting a prepaid card. There aren’t even any inquiries made of ChexSystems, an organization that keeps track of folks who have had trouble managing bank accounts such as creating excessive overdrafts or closing accounts that have negative balances. That means that even people who are denied bank accounts can get a prepaid credit card.

Clarifying a Couple of Points

There are a couple of often misunderstood conceptions regarding prepaid credit cards that warrant explanation:

• Prepaid Credit Cards are Debit Cards – Despite the name, a prepaid card is actually a special purpose, reloadable debit card. The card can only be used to pay for purchases, rentals and bills to the extent that funds have been deposited to the card account. No bank account is needed for this type of debit card.

• They Don’t Help Build Credit – Since no money is ever loaned and paid back, potential creditors don’t look on successful use as a measure of credit worthiness. Possessing and using a prepaid card isn’t reported to the major credit agencies like, Experian, TransUnion or Equifax. Some prepaid cards make reports of bills being paid to a credit reporting agency called PRBC, Payment Reporting Builds Credit, but this doesn’t affect the FICO score that is critical for obtaining future credit.

Benefits of Prepaid Credit Cards

• Make Purchases and Get Cash – Purchases can be made in stores or online just like with any other credit or debit card. There are, nonetheless, a couple of situations in which using these cards can be a bit inconvenient and we’ll talk about them below.

• No Interest – With a prepaid card, purchases are made against money that has been deposited to the card account. Since no money has been loaned, there are no interest charges.

• No Debt – Since no credit has been extended, there’s no danger of getting into debt. If there’s an attempt to use the card for more than its available balance, the transaction will be denied.

• No Monthly Payments – With a prepaid card, the money spent has already been placed on deposit with the card so there simply isn’t an issue of paying the bill. This also means there’s no chance of late fees or over limit charges.

• Avoid Check Cashing Charges – For people without bank accounts, cashing paychecks or other checks can get really expensive. Taking advantage of the direct deposit feature of prepaid credit cards can all but eliminate this expensive hassle.

• Pay Bills Online – Online bill paying is one of the great conveniences of the digital age. You can use a bank account to make such payments but without an account, a credit card is a must.

The Occasional Obstacle

Prepaid cards generally can be used just like more traditional credit cards but there are a few exceptions to be aware of:

• Paying at the Pump – Yes, a prepaid credit card can be used to pay for fuel purchases at the pump. However, when a prepaid card is inserted into the pump, a temporary hold is put on the funds totaling more than enough to pay for the purchase. Since there’s no way to know how much the purchase will be, it’s typical for $75 to be tied up until the transaction is actually settled, at which point the remaining funds are released back to the account. This usually takes a few days. The situation can be avoided by paying the gas station attendant inside. That way, only the actual amount of the sale is charged.

• Renting a Car – Most car rental agencies will accept a prepaid credit card as payment and to reserve a rental. Generally, they will require putting the entire estimated rental charge plus 15% on hold on the card until the transaction is settled. The principle is essentially the same as when buying gasoline at the pump…the final price isn’t know until the rental contract is complete. Once settled, any unused funds are released back to the card. It’s always best to check with the agency in advance to make sure that they’ll accept the prepaid card.

• Reserving a Hotel Room – Stories of hotels not accepting prepaid credit cards are not uncommon. When making a reservation, it’s a good practice to ensure that the prepaid card won’t be a problem. Presuming that the card is accepted, it’s customary for them to place the entire estimated charges plus 15% on temporary hold on the card just like with car rentals.