What are prepaid credit cards? (with photos)

Prepaid credit cards are often similar to regular credit cards, but they may come with fees.

Prepaid credit cards, more accurately known as secured credit cards, have a credit limit based on a security deposit that the account holder must make in advance. In all other respects, this account type works like a standard unsecured credit card. Credit accounts of all types require payments to be made on time and the account to be used responsibly, but a security deposit reduces the risk for the bank, making it easier for many people to obtain prepaid credit cards.

credit vs. debit

The credit card is being swiped through a terminal.

Prepaid credit cards are different from prepaid debit cards. A debit card deducts funds from the amount of money deposited in the account associated with it, while a credit card makes purchases on credit, which must be repaid with funds from another account. In the case of a secured card, the funds used to pay the bill cannot come from the security deposit in most situations.

Some prepaid cards require users to pay high fees and interest rates.

Many people seek this financial solution because of insufficient credit. A prepaid credit card will improve a person’s credit only if payments are made in a timely manner. If payment on time is not possible, a prepaid debit card may be the most suitable solution, as the money will be automatically deducted.

get an account

To open a secured line of credit, the applicant must first find a company that offers this service. Prepaid credit cards may require an application fee as well as an annual fee. The amount the issuing company charges can vary widely, so applicants should thoroughly research any card they are considering, along with the company and credit agreement. The person will have to apply for the card like any other credit application.

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Many prepaid credit cards are subject to high fees and interest.

Once approved, the person will need to open the account and pay the security deposit. The deposit amount is normally equal to the credit limit; it may be possible to increase this limit if more money is added to the deposit. Once the money is deposited, the account holder receives a physical credit card that can be used like any other.

The borrower can demonstrate that he is financially responsible by making regular small purchases and paying them in a timely manner.

Typically, the person who opened the account will receive an invoice each month for the amount they charged the card. Each company has its own policies, however, and all accounts must have their due dates clearly defined. If a payment is missed, the account holder will likely be charged a penalty and any amount not paid at the end of the billing cycle will have an interest charge – some percentage of the original amount – added to it.

Advantages and disadvantages

People with bad credit are generally eligible for a prepaid credit card, even when they cannot be approved for a standard card. As such, it is often used as a way to build good credit. By making regular small charges and paying them each month, the borrower can show that he is financially responsible. In many cases, after a year or more of making regular payments, an escrow account can be converted to an unsecured one.

Many prepaid credit cards are subject to very high fees and interest, however. This means that if charges aren’t paid every billing cycle, the amount the person owes can quickly grow. This can make an escrow account riskier than other types because the security deposit can be lost if the borrower is unable to pay. Also, the security deposit may not earn much interest and cannot be accessed easily by the account owner.

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In some cases, a prepaid credit card may be “flagged” as such on the borrower’s credit report. This tells other potential creditors that the account is secured and can make it more difficult for the person to improve their credit. A person who is already struggling with financial problems may find that these disadvantages only make matters worse, nullifying the card’s potential benefits for improving the person’s credit rating.

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