$352 billion by 2023.
Yet, as popular as they are, there is a ton of misunderstanding about them. For example, there is no such thing as a prepaid credit card. In fact, they are opposites. Here we take a look at some common features of prepaid cards and how they compare to other card types.
What are the different types of cards?
Here are the 4 main types of cards you’ll encounter when looking for a financial card, along with how they work and what makes them unique.
A prepaid card, also called a pay-as-you-go card, is a product that only lets you spend money you’ve loaded onto it in advance. Instead of borrowing money from a bank that you must pay back later (as with a credit card), you are spending your own preloaded money. One of the conveniences of prepaid cards is that they are available almost anywhere, from grocery stores to gas stations, and you can use them anywhere their charge card requires you to pay your balance in full each month to avoid a penalty. Unlike credit cards, charge cards have no preset spending limit or APR. These cards tend to have excellent rewards and benefits and are primarily offered by American Express.
Can you build credit with a prepaid card?
No, there’s no way to build credit with prepaid cards. Credit is established through positive borrowing history. Since you provide the money upfront when you purchase a prepaid card, you’re not borrowing or repaying any money.
While prepaid cards may make sense for some situations, it’s important to build credit. Good credit can be a bridge to the things you want. Having no credit or bad credit can be a roadblock in achieving your goals, such as buying a house, getting that next great job or lowering your insurance premiums. If you want to dip your toe into credit building, explore Consumer Financial Protection Bureau enacted a rule in April 2019 that makes the fees and other details of your card more clear with formatting that’s similar to the credit card Schumer Box.
The new rule also allows you to access your account online, like a bank account or credit card. It also provides greater protection from loss, theft or incorrect charges, according to CFPB.
Is a prepaid card a bank account?
No. A prepaid card is a standalone financial product that you load with money, then it eventually runs out of money unless you reload more. A bank account’s card is called a debit card – it operates in a similar way, but it is tied to the account’s funds. Neither is a credit card, which basically provides short-term loans to the cardholder.
A prepaid card can have similar features to a bank account, however. For example, you can use it to deposit your paycheck or auto-debit bills. This is because routing and account numbers can be assigned to the card.
Neither a prepaid card nor a debit card can be used to build credit, while you can build credit with a credit card. If your credit isn’t its best, try taking out a secured credit card for credit-building. Just make sure the card issuer will notify the 3 major credit bureaus of your credit habits.
Who should get a prepaid card?
Prepaid cards are increasingly popular, with the number of U.S. adults who used these products at least once a month increasing by 50% from 2012 to 2014, according to a 2015 Pew Trusts study.
But who should use a prepaid card? You might embrace them because you can’t land a checking account – according to the FDIC, 8.4 million households in the United States did not have a bank account as of 2017. Or perhaps you appreciate the convenience. One thing we know – consumers typically choose prepaid cards to control spending, control fees or make purchases.
“A prepaid card may be a particularly good choice for a high schooler or college student,” says hfyhpf120.com Industry Analyst B&C Media LLC. “If you attempt to, the transaction will just be denied. So, prepaid cards impose a type of financial discipline – to spend only what you have. Credit cards, on the other hand, allow you to spend more than what you have. For some, the temptation is too great. That’s why 65% of credit card users carry a credit card balance. Those users not only spend beyond their means but also finance their over-spending with high-interest debt.”