How does a prepaid credit card work?


Quick Answer

Prepaid credit cards allow cardholders to load their cards with funds in order to make purchases, explains Investopedia. The cards function like a gift card and are useful for people who want to manage their finances properly, as cardholders cannot spend more money than they have.

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Full Answer

Prepaid credit cards carry a Visa, MasterCard or American Express logo, and they can be used anywhere credit cards are accepted, states About.com. After using the entire balance in a prepaid credit card, the cardholder must reload it with money before using it again.

Because there are no debts involved, cardholders do not have to pay interest rates, late payments or finance charges, notes About.com. Additionally, using a prepaid credit card does not involve due dates or a revolving balance. However, prepaid credit card providers charge for various services, such as card activation, money reloading, PIN purchases and ATM withdrawals. Cardholders also usually pay a monthly transaction fee.

Prepaid credit cards usually benefit individuals who do not have a credit card or cannot obtain a checking account due to bad credit, states About.com. Prepaid credit cards do not help in improving or establishing credit, as purchases made using these cards do not appear on a credit report.

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