Q:

What's the difference in a prepaid credit card and a traditional card?

A:

Quick Answer

A prepaid credit card requires a cardholder to preload it with money before using the card for purchases and payments, whereas a regular credit card allows a cardholder to buy things through borrowed funds, explains Investopedia. The former is similar to a gift card, while the latter involves interest rates and borrowing limits.

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Full Answer

People generally use traditional credit cards to pay for items through credit at point of sale, notes Investopedia. Financial companies set borrowing limits based on a person's credit rating, and they typically charge interest the following month after making a purchase.

In comparison, prepaid credit cards function like normal credit cards, without the risk of accumulating debt, as cardholders must load sufficient amounts of funds to buy their desired items, states Investopedia. These cards are a good option for individuals who find it difficult to manage finances when using regular credit cards.

Prepaid credit cards also serve as an alternative to traditional bank accounts, because cardholders do not have to link to a bank account in order to use the cards, according to CreditCards.com. Additionally, individuals with bad or no credit can obtain prepaid credit cards, as a credit check is not necessary. Most prepaid credit cards allow users to withdraw from an ATM, make online payments and authorize payment to creditors, who then receive an electronic or paper check from the prepaid card provider.

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