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How Do Prepaid Credit Cards Work? All You Need to Know

Ever left your wallet at home while running errands? That must have been quite frustrating. But what if you had a card that could save you from situations like this without the hassle of traditional debit or credit cards? This is where prepaid credit cards come in.

Prepaid credit cards have revolutionised the way people transact and manage finances. They are accessible, convenient and give users better control over their finances, making them increasingly popular as financial transactions shift to cashless methods.

This article explains prepaid credit cards and how they work, including their perks, downsides, and how to obtain and use them, among other details. So, if you are exploring prepaid credit cards and are unsure how they work, this article covers the essential information you need to get started.

Let’s get into it.

What are prepaid credit cards?

Prepaid credit cards are alternatives to regular debit cards. Like debit cards, they are used to purchase and make payments. However, they are not linked to a line of credit. Instead, you load money to the card in advance and top it when necessary. In addition, unlike an online credit card, you can’t build up debt with a prepaid credit card because you can’t spend beyond the available funds on your card.

So, while a prepaid credit card won’t increase your credit score, it’s a convenient way to pay bills. Rather than carry cash around, you can simply load funds in your prepaid card and make payments effortlessly. Examples of prepaid credit cards include ANWB prepaid credit cards, Express prepaid credit cards, etc.

How do you obtain a prepaid credit card?

Follow this step-by-step process to obtain your prepaid credit card:

  1. Research: Compare different prepaid card options, explore their features and benefits, and pick your preferred choice.
  2. Apply: Apply online or in person for your card. Do this by supplying the required information. Typically, you’ll need to provide the following details:
    – Full name and contact details, including your name, address, phone number, and email address
    – Date of birth
    – Social Security Number (SSN) and Tax Identification Number (TIN)
    – Government-issued identification forms, such as a passport or driver’s license
    – Employment information
  3. Verify: Depending on the card issuer’s policies, you may need to verify the information and documents you’ve provided. Do this by supplying additional documents or information.
  4. Pay for the card and load funds: Pay for the cost of the card and the amount you wish to load into the card. You can do this through transfers, direct deposits, or cash reloads.
  5. Activate: Activate your prepaid card by following the instructions requested by the issuer.

Note that the steps in obtaining prepaid credit cards vary based on the issuer’s policies. So, read the terms and conditions attached to obtaining a prepaid credit card before applying for one.

Benefits of using prepaid credit cards

Although prepaid credit cards work like every other card, they offer unique benefits. They include:

  • Financial control and budgeting: Using a prepaid credit card means funding your card with a specific amount of money. Since you can’t spend beyond the amount on the card, you have a spending limit which gives you better control over your finances.
  • Avoid debt: Unlike online credit cards, prepaid credit cards let you stick to a budget. They don’t offer a line of credit, so you can’t borrow or spend more than you can pay at a certain period.
  • Convenience: Prepaid credit cards are more accessible than regular cards. They are also widely accepted by merchants. You can use them for in-store purchases or online transactions.
  • Safety and security: Only the amount you’ve loaded can be accessed if your prepaid card is stolen, providing some level of security and safety.

Downsides of using a prepaid credit card

The following are the drawbacks of using a prepaid credit card:

  • Limited funding options: Some prepaid cards may have limitations based on how much you can load, restricting funding capacity.
  • Reload fees: Some prepaid card issuers charge reloading fees. These additional charges may add up over time and increase the overall cost of owning a prepaid credit card.
  • Fewer consumer protection policies: Although the Consumer Financial Protection Bureau included consumer protection for prepaid users in 2019, these protections are not as comprehensive as traditional cards.

How to use a prepaid credit card 

Follow these tips to use your prepaid credit card effectively:

  • Add funds: You must load funds to use your prepaid credit cards. Load funds through transfers, direct deposits, cash reloads, etc.
  • Check available balance: Always check the available balance before making purchases with your prepaid credit cards. This lets you track your spending.
  • Pay bills: Use your prepaid credit card for bills and online purchases. Like regular debit cards, you can use them for in-store purchases, online shopping, etc.
  • Track transactions: Regularly review transactions to monitor your spending and track your balance for accuracy.
  • Reload: Reload when the funds in your prepaid card reduce.

What are the safety and security features of prepaid credit cards?

Here are common safety and security features prepaid credit cards offer:

  1. Card verification: Prepaid cards have card verification details that prevent sketchy transactions, including the expiration date, security code, unique card number, etc.
  2. PIN verification: Prepaid credit cards often require a Personal Identification Number (PIN) for online transactions and cash withdrawals, preventing fraudulent use.
  3. Zero-liability policies: Many prepaid credit card issuers do not hold users liable for unauthorised transactions made on their cards, offering an additional level of protection.

How to maximise the benefits of prepaid credit cards 

Consider the following tips to leverage prepaid credit cards perks and avoid common pitfalls:

  1. Research extensively: Explore different credit card options before making a decision. Opt for the prepaid credit card option with low fees, solid security features, accessible loading options, etc.
  2. Read the terms and conditions: Understand the terms and conditions associated with your card, including maximum load amounts, spending limits, etc. Doing this will help you avoid unnecessary charges and inconveniences and make informed decisions.
  3. Stay updated with the card’s policies: Regularly review the card’s policies to stay updated with changes. This will help you maintain compliance with policies and prevent penalties.

Check expiration dates: Remember your prepaid card’s expiration dates and use the cards on or before it expires. Some card issuers let you transfer the remaining funds to other accounts before the card expires.

Control your finances with CFPS

CFPS mobile banking app offers control, convenience, and security and enables effective financial management. Therefore, harness these benefits to budget, live within your means, and avoid debt to enhance your financial control.

At CFPS, we help you take charge of your finances by enabling you to transfer, spend, and save money seamlessly. Our cross-platform mobile application adopts innovative tools for easier financial management. Visit our main page to learn more about how we help you take control of your finances.

Posted on November 1, 2023