What Is a Prepaid Credit Card?

You've probably seen and heard of prepaid credit cards. But you may be wondering, what is a prepaid credit card and how does it work? You can use prepaid cards to make purchases both in person and online. These payment tools function a bit differently than credit cards, however. This guide will help you understand how prepaid credit cards work and what you should consider before using them.

What is a prepaid credit card?

A prepaid credit card is a card that can be used to make purchases, and it looks a lot like a traditional credit card. However, the card is not linked to a bank account like a debit card. It's also not money that is borrowed from a lender, like a credit card. Instead, you can only spend whatever money is loaded on a prepaid credit card.

For example, if you purchase a prepaid card and load $100 onto it, you can only spend up to $100. In a way, a prepaid card is similar to a gift card. When you buy a gift card, it has a preloaded amount of money that you can spend.

How does a prepaid card work?

When you buy a new prepaid card, you'll load money on the card to "fund" your purchases, and then you can spend whatever money you add to it. Prepaid credit cards also allow you to add additional funds in the future. Note that you may be charged fees to do this, depending on how you load the money onto the card.

You can purchase prepaid credit cards at convenience stores and supermarkets, or order them directly from card issuers. Since most prepaid credit cards can be used anywhere credit cards are accepted, they're a convenient payment tool.

What are the benefits of using a prepaid credit card?

Here are some benefits that come with using a reloadable prepaid card.

They're easy to use

If you don't have cash on hand and want to pay with a card, you can easily use a prepaid credit card. They're convenient and are accepted in most places, just like credit cards.

You can use prepaid cards online

You can use prepaid cards to buy items in person or shop online. If you don't yet have a credit card, the ability to make purchases and pay bills online may be helpful.

No credit requirements or credit checks

Unlike many credit cards, there are no credit score or credit history requirements to get a prepaid card. Anyone can buy and use a prepaid card. If you have limited credit, or poor credit, this may be attractive to you.

You can avoid interest charges

While prepaid cards may have some fees, you won't have to worry about paying credit card interest on your purchases. Since you're not borrowing money when using a prepaid card, there are no risks of being charged interest.

Prepaid cards can be gifted

Some people like to give prepaid credit cards as a gift. This can be a nice alternative to giving someone cash or a store gift card.

Prepaid cards may help you spend less money

Some people may find prepaid cards to be a good budgeting tool. Since you can't spend more money than what is loaded on the card, you may be able to limit your spending.

Prepaid cards can be a good educational tool

Some parents use prepaid credit cards to help children and teens learn more about money management. These cards can offer a way to teach financial responsibility.

What are the drawbacks of using a prepaid credit card?

While prepaid credit cards are convenient and easy to use, they have some drawbacks.

Prepaid credit cards can't help you build credit

Your activity won't be reported to the credit bureaus when using a prepaid credit card. That means you can't use prepaid credit cards to build credit or improve your credit score.

You can only spend what's loaded on the card

The money loaded on your card is your spending limit. If you want to spend more, you'll need to add more money to the card.

Prepaid credit cards often have expensive fees

Many prepaid credit cards charge fees. These may include inactivity fees, transaction fees, declined transaction fees, and reloading fees.

You likely won't be rewarded for your spending

Some prepaid cards offer rewards, but many don't. If your goal is to earn rewards, look into using a rewards credit card instead. The rewards may be more lucrative and more flexible.

Can you earn rewards with prepaid credit cards?

Many prepaid credit cards don't earn rewards. This means you can use them to make purchases, but you won't earn rewards on your spending.

It's not common for a prepaid card to offer rewards. If you're planning to get and use a prepaid card and want to earn rewards, look into the card's details first to make sure you understand how it works, whether it earns rewards, and if the fees charged are worth the rewards earned.

Instead of getting a prepaid card, another option is applying for and using a rewards credit card. You may be able to earn cash back or redeem points for flights or hotel stays.

READ MORE: Best Rewards Credit Cards

Can you build credit with prepaid credit cards?

When you use a credit card, you're borrowing money to pay for a purchase. You pay the money back later -- this is how credit cards work. Your spending and payment activity is reported to all three credit bureaus and therefore is shown on your credit report.

But that's not the case with prepaid credit cards, so you can't build your credit score with one. When you use a prepaid card, you're spending preloaded money. Since the money isn't borrowed from a lender or card issuer, no information is reported to the credit bureaus.

If you want to build your credit, you should consider applying for a credit card. Using a credit card and using it responsibly by making on-time payments and maintaining a low credit card balance can help you improve your credit score and personal finances.

READ MORE: Can You Build Credit With Prepaid Cards?

The bottom line

Prepaid credit cards are convenient and easy to use, but they don't function exactly like credit cards. They have limitations, aren't a credit-building tool, and can come with costly fees.

If you want a convenient payment solution and want to build credit, using a credit card may be the best choice. If you have poor credit or a low credit score, you may want to consider exploring credit cards for bad credit.