What is a Prepaid Credit Card: Understanding in Detail

As an additional benefit to users, various banks and financial institutions issue prepaid credit cards which come with loaded funds for cardholders. Prepaid credit cards are quite similar to the traditional credit cards and work in a very simple process. The only major difference between a normal credit card and a prepaid credit card is that prepaid cards allow customers to make purchases from the funds available on the prepaid card, instead of borrowing money from the banks.

Prepaid cards allow their users to make purchases until the time funds are available in their cards, similar to gift cards/vouchers. Let’s dig deeper into what a prepaid card is, how it works and how you can get one!

Features

The following points explain what a prepaid card is into further details-

  • Prepaid credit cards basically work as gift cards- meaning that they can be used to make payments with the amount that is already available in the card
  • These cards do not work like traditional credit cards, which means that user do not borrow any money from banks/credit card issuers to make payments
  • Prepaid card users have to adhere to a limit (the maximum amount that is available in the purchase credit card) to make purchases
  • Banks/credit card companies may charge a nominal fee from the user for issuing a prepaid credit card
  • Prepaid cards are not issued to users on the basis of their credit score

Benefits

The following reasons explain why you should buy a prepaid credit card-

  • One of the biggest advantages of a prepaid card is that users can make transactions without having to incur any debts and/or pay interests in the future
  • Credit score does not play a key role in the issuing of prepaid credit cards
  • Cardholders can use these cards to make payments for both, goods and services without having to worry about carrying cash
  • Some prepaid cards also allow users to make cash withdrawals at ATMs
  • Prepaid credit cards allow customers to manage their expenses as they will be aware of the amount that they have in hand, to spend for the specific time period
  • Prepaid cards can be the best type of credit cards for users who are not looking for any other specific features
  • Users can easily make their payments using prepaid cards through their mobile phones
  • Prepaid credit cards also work as gift cards and travel cards, which can be used to make payments abroad
  • Certain employers offer the option of transferring employee’s salary to his/her prepaid credit card

Types of Prepaid Credit Cards

Users can buy any of the following types of prepaid credit cards-

  • Reloadable credit cards- These credit cards allow customers to add more funds, once the current amount in the card is used.
  • Non-reloadable credit cards- These credit cards function exactly opposite to the reloadable credit cards. This means that these credit cards do not allow users to add money to the card once the current balance is used.
  • Open looped credit cards- Also known as open system credit cards, these cards are branded with the network that they are affiliated to. As a result of this affiliation, all of these cards carry a logo of the affiliate’s brand and are issued only by a few banks. Since these cards are open looped, they are accepted by all merchants and at all locations.
  • Closed loop credit cards- Unlike open looped credit cards, these cards are accepted only at the affiliated merchant outlet. Generally, it is only closed loop credit card holders who are issued gift cards.
  • Semi-open loop credit cards- Working as a mix of open looped and closed loop credit cards, semi-open loop credit cards are the ones that are accepted by multiple merchant outlets, who are affiliated with the card. Most of these cards are issued by retail chains or shopping malls only and can be used at all locations that have stores with the affiliated brands.

Drawbacks of Having a Prepaid Credit Card

Before you decide to get yourself a prepaid credit card, take a look at the drawbacks of a prepaid credit card-

  • A prepaid credit card cannot be used unless there is any money loaded into it
  • Unlike other credit/debit cards, prepaid cards are not so secure and hence, can be misused easily
  • Banks do not report the payment history of a prepaid credit card since there is no revolving credit limit involved. As a result, your transactions are neither recorded, nor reported to the major credit bureaus. Hence, prepaid credit cards do not impact user’s credit score as well

Difference Between Prepaid Card, Credit Card & Debit Card

Study the table below to understand how a prepaid card, a credit card and a debit card can be differentiated-

Prepaid CardCredit CardDebit Card
You can spend only the amount of money that you have previously loadedYou can spend the amount of money that your bank has set the limit forYou can spend as much money as is available in your account
These cards can be linked to a specific business brandThese cards can be used at any store/merchantThese cards can be used at any store/merchant
Upon spending the entire amount, you may reload your card with cash/chequeUpon spending the entire monthly limit, you need to clear your current dues and restart your expenses on the card from the next monthYou can keep depositing money to your bank account to continue using your card
Prepaid cards work as gift cards/vouchers, without any debt or high interest chargesCredit cards work on debts borrowed from banks, and charge interest on the borrowed amountDebit cards work on the amount available in your bank account, and do not charge any interest on the money spent

To Conclude:

Prepaid cards are secured with prepayments and work only on the money loaded into the card beforehand. More like gift cards, prepaid cards can be used at select stores/merchants as they are linked to affiliate brands and come with the brand logos printed on them. It is important not to confuse prepaid credit cards with traditional credit cards as these cards don’t work on borrowed credit from banks/credit card issuing companies. Prepaid credit cardholders can spend only that amount of money that is preloaded into the card and not more. If your needs match to that of a prepaid credit card, these cards can be one of the best options for you to use.

FAQs
What is a prepaid credit card?
Prepaid credit cards basically work as gift cards- meaning that they can be used to pay with the amount that is already available in the card. These cards do not work like traditional credit cards, which means that users do not borrow any money from banks/credit card issuers to make payments.
What are the benefits of using a prepaid credit card?
One of the biggest advantages of a prepaid card is that users can make transactions without having to incur any debts and/or pay interests in the future. Credit score does not play a key role in the issuing of prepaid credit cards. Cardholders can use these cards to make payments for both goods and services without having to worry about carrying cash. Some prepaid cards also allow users to make cash withdrawals at ATMs.
Are there any disadvantages of using a prepaid card?
A prepaid credit card cannot be used unless there is any money loaded into it. Unlike other credit/debit cards, prepaid cards are not so secure and hence, can be misused easily. Additionally, unlike a credit card, prepaid cards do not help users improve their credit score, even upon continuous usage.
What are open looped credit cards?
Open looped credit cards are branded with the network that they are affiliated to. As a result of this affiliation, all of these cards carry a logo of the affiliate’s brand and are issued only by a few banks. Since these cards are open looped, they are accepted by all merchants and at all locations.
Can I add more funds to my prepaid credit card once the current amount is used?
Yes, you can add more funds to your prepaid credit card once the current amount is used. Reloadable credit cards allow customers to do so by adding more funds, once the current amount in the card is used.
Are prepaid credit cards the same as traditional credit cards?
It is important not to confuse prepaid credit cards with traditional credit cards as these cards don’t work on borrowed credit from banks/credit card issuing companies. Prepaid credit cardholders can spend only that amount of money that is preloaded into the card and not more, unlike traditional credit cards.
What are semi-open looped credit cards?
Semi-open loop credit cards are the ones that are accepted by multiple merchant outlets, who are affiliated with the card. Most of these cards are issued by retail chains or shopping malls only and can be used at all locations that have stores with the affiliated brands.
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