Prepaid Credit Cards - a Misnomer
Contributed by Deb Powers
Prepaid Credit Cards - a Misnomer
Prepaid credit cards, also known as 'rechargeable' credit cards, have been growing in popularity in recent years. They're widely touted as a convenient way to re-establish your credit, repair your credit, or just have the convenience of a credit card without having a 'real' credit card. Before you can evaluate just how useful a prepaid credit card might be for you, it helps to understand exactly what a prepaid 'credit' card is.
Prepaid credit card - a misnomer.
The first thing to know is that 'credit' card is a misnomer. A credit card allows you to purchase things with money that you've not yet earned. When you use a credit card, the issuing bank forward the amount of your purchase to the merchant you bought from, then bills you that amount, along with interest and fees. You pay for the convenience of being able to purchase things immediately without saving the money in advance.
A prepaid credit card works differently. They can be purchased online, or in a store. You pay a setup fee, plus an amount of money that will then be available to you for your use. When you use a prepaid credit card, the issuing company deducts the amount of your purchase from the amount that you've 'stored' on your card. When you run out of money, you can add more to it. There is no credit advanced. All the money that you have access to via your 'credit card' is money that you have deposited to your account. It is, essentially, a debit card without a bank account.
How is a prepaid credit card different from a secured credit card?
With a secured credit card, you are required to make a deposit to a bank account with the bank that issues your credit card. You then receive a line of credit that is a percentage of the amount that is in that account. When you make a purchase with a secured credit card, the issuing company forward the payment to the merchant, then bills you for the amount in monthly increments, along with interest and fees. The money in your 'securing' account is never touched unless you default on payments.
Many secured credit accounts can eventually be transferred to non-secured accounts once you've established that you'll pay your bills on time and in full. At that point, you can get your security deposit back.
