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A prepaid card is a payment method that enables you to pay for goods and services at many physical and online stores.
A prepaid card is a payment method that enables you to pay for goods and services at many physical and online stores. While prepaid cards share similarities with credit cards, debit cards and gift cards, they are not the same as any of these.
Prepaid cards operate similarly to gift cards: Funds are loaded in advance, and you cannot spend more money than there is on the card. However, prepaid cards are not tied to any specific merchant, so you can use prepaid cards in most places that accept debit and credit cards.
Here are the key differences between prepaid cards, credit cards and debit cards.
| Prepaid cards | Credit cards | Debit cards | |
|---|---|---|---|
| Overview | Also called stored value cards, prepaid cards enable you to make purchases with preloaded funds | A form of revolving credit, credit cards let you borrow money up to a limit to make purchases | Tied to your bank account, debit cards enable you to access your funds when making purchases |
| Fees | May involve monthly fees, activation fees and other charges | Interest charges on unpaid balance and annual fees on some cards | Overdraft fees if you spend more than your account balance |
| Payments | Pay before, spend now | Spend now, pay later | Spend now, pay now |
| Withdrawals | May allow for ATM withdrawals | May allow for cash advance withdrawals | Allow for withdrawals at ATM |
| Requirements | Generally no requirements | Usually require a credit check | Require a bank account |
Read on to learn about how prepaid cards work, whether they affect your credit score and reasons you may want to use one.
How do prepaid cards work?
Prepaid cards work similarly to debit and credit cards, but they must be purchased and loaded with funds before you can use them. When you’re ready to make a purchase with a prepaid card, you simply swipe the card—or enter the card information if you’re using it for online purchases.
You can purchase a prepaid credit card at many big-box retail stores, and you’ll often have to pay an activation fee at the time of purchase. You’ll be able to spend up to the amount of money you put on the card, and you’re generally able to reload the card with additional funds later by visiting a retail store that partners with your card’s issuer.
Although prepaid cards often have Visa or Mastercard logos, they are not credit cards. Here are a few key features of prepaid cards:
- No bank account or credit check is required. Unlike a debit card, which requires a bank account, or a credit card, which requires a credit check, prepaid cards are accessible to anyone with the funds to purchase one.
- Spending limits are set by what you load. Debit cards can often be overdrafted, and credit card issuers set spending limits, but prepaid cards enable you to spend exactly the amount of money you put on to them.
- Federal protections are included. Similar to debit and credit cards, prepaid cards are backed by insurance and consumer fraud protection to help you if your card is stolen or the card issuer goes bankrupt.
While prepaid cards can be useful for making purchases safely, they are not a substitute for debit cards or credit cards, which both offer additional features that prepaid cards cannot match. For example, debit cards give you access to a checking account that typically generates interest, and credit cards enable you to borrow money up to a predetermined spending limit.
Do prepaid cards build credit?
Prepaid cards do not affect your credit score and can’t help you build credit. There are a couple of reasons why prepaid cards don’t have any impact on your credit:
- Prepaid card activity isn’t reported to the credit bureaus. The three credit bureaus that keep track of your credit history report information about your accounts—like loans or credit cards—but they don’t have any information about prepaid cards.
- Prepaid cards don’t involve credit. Since your credit score reflects how well you manage borrowed money, prepaid cards are not a good reflection of that, since you’re spending money you’ve already preloaded.
If you’re looking for a way to build or rebuild your credit, consider getting a secured credit card. A secured credit card is backed by a deposit, so you’re often able to get access to this type of card with a poor credit score or no credit history.
Like a prepaid card, you’re spending money you’ve already provided to the card issuer rather than borrowing money. However, a secured card is reported to the credit bureaus—so making payments on time can help boost your score over time.
Before getting a prepaid card, consider what the best option for you may be.
Should you use a prepaid card?
Whether or not you should use a prepaid card is a personal decision, but there are a few factors to consider when determining the right type of card for you.
Here are a few reasons people cite for using prepaid cards:
- Prepaid cards are safer to carry around than cash.
- Prepaid cards can be used to make purchases online.
- Prepaid cards can help limit spending if you struggle with impulse purchases.
- Prepaid cards are available without a credit check.
In any of these cases, a prepaid card could be a good option for you. However, a secured credit card may also be a viable choice that also helps you build credit. Secured cards are safer than cash, offer consumer protections, limit you to spending only your deposit and typically do not require a credit check.
If you do end up getting a secured card to start building your credit, you’ll want to begin monitoring your credit and getting a free copy of your credit report from each of the three bureaus. As you work on your credit, keep an eye on your report for any inaccurate information—especially false negative items that could be impacting your score.
Working with a credit repair consultant can be a helpful way to assess your current credit situation and work toward your goals.
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