Prepaid Credit Cards
What is a Prepaid Credit Card?
A reader recently emailed and asked, “What is a prepaid credit card”. A prepaid credit card is very similar to a debit card, except the debit account is issued and stored on computers affiliated with the issuer of the prepaid credit card. If you are thinking of a personal debit card, you are probably thinking about a debit card issued by your local bank and tied to your personal savings or checking account. The prepaid credit card has an account specifically tied to that card, and has a value the same as the amount listed on the card. Visa and Mastercard, along with many other credit institutions, offer their own prepaid credit cards.
There are a variety of prepaid cards on the market today, so let’s go over the various types.
Prepaid Cards
- Gift Cards – The gift card is considered a “closed system prepaid card”. It’s a “closed system” because the gift card only works in certain retail outlets. For instance, if you buy a Starbucks gift card, that card is only going to work in participating Starbucks stores. If you buy a Target gift card, the card will only worked in Target stores. In either case, you buy a card with a fixed amount of money on it. When you buy a $40 card, the card has a stored value on it and will be useless when the forty dollars have been spent. These cards are issued anonymously, so whoever holds the cards can spend the money.
- Open System Prepaid Credit Cards – These cards are generally what you’re thinking of when you say “prepaid credit card”. These cards work anywhere most standard issue credit cards work. Also, when you buy these cards, you register them with a central database, therefore tying the card to your personal information. If you wish, you can transfer funds from another account you own into this prepaid credit card. The account information is kept in a computer maintained by the issuer of the credit card: often Mastercard or Visa. Essentially, this kind of prepaid credit card becomes an alternative debit card. “Debit card” is a better descriptor, because the credit card company is not really offering you a line of credit. You must pay into the account before you can use it, though you’ll usually have a certain amount of money stored in the card at the start: the amount you paid to purchase the credit card (or a little less, given surcharges, taxes and other fees).
- Stored Value Cards – The prepaid credit card differs from another similar credit account card, the “stored value card”, in that the stored value card is generally issued to an anonymous person. That is, if you walk into Wal-Mart and buy a $50 prepaid gift card issued by either Visa or Mastercard, that card can be used by anyone holding the card (or its number). Like other gift cards, these prepaid cards will expire when their limit is met – in this case, the $50 gift card limit. Unlike a gift card, though, these storage value cards back by a credit card institution (and not by the store chain itself) will work just about anywhere that your credit card will work.
- Prepaid Phone Card – This is a certain kind of stored value card or open system prepaid credit card which allows specifically for phone calls. These cards are bought for those people wanting to make long distance phone calls or otherwise fund their cellphone usage or texting, but who cannot use their standard credit card or cash to pay for their telecommunications.
What Is a Prepaid Credit Card – Why should I have a prepaid credit card?
There are several reasons to use a prepaid credit card instead of a credit card or debit card associated with your bank accounts. These might include gift giving, anonymity, internet security reasons or an inability to be issued a line of credit (bad credit or lack of qualifications). This latter case is the most common reason for buying a prepaid credit card.
Prepaid Credit Card Anonymity – Prepaid Credit Card Security
Stored value cards and gift cards do not require you to identify yourself. This way, you can make a purchase without giving out your personal information or exposing your credit card information to identity thieves. If you wish to avoid fraud or identity theft, you can purchase a prepaid credit card that is not tied into your standard money accounts. Without access to your bank account, a thief can only take from you the amount of money on the prepaid credit card – usually no more than $100. That’s no fun, but it’s nothing like the hassle and danger you put yourself in by paying with your credit card.
For instance, I don’t like giving out my credit card information to just anyone online. If there’s a purchase I want to make, but I’m afraid the merchant will continue billing my credit card account after I try to cancel a subscription, I’ll sometimes buy a gift card for around the amount of money being transferred. I don’t have to make call to my credit card company to cut off this merchant. Or if I’m just not sure if an online merchant is exactly trustworthy (or don’t want my information sold to a mailing list), I’ll use my prepaid credit card to maintain my anonymity.
Bad Credit and Prepaid Credit Cards
If you have a bad credit score and you can’t get a credit card, but you still want the ability to buy items online or in stores with a virtual credit card, the prepaid credit card gives you the ease and efficiency of buying with a card. You don’t have to carry around a wad of cash or a checkbook, but can pull out a Visa prepaid credit card or Mastercard prepaid credit card and use it.
I’m told that people who do not have their citizenship, and therefore find it difficult or impossible to apply for a credit card, often use prepaid credit cards for the same reason.
Prepaid Credit Cards as Gift Cards
If a parent wants to give a child a credit card for an emergency, but doesn’t want their child have their own adult line of credit, that parent can buy a prepaid credit card and determine exactly the amount of money that child will have on the card. For instance, with the open system prepaid credit card, a parent can purchase the prepaid credit card and transfer (as an example) $500 into that debit card. You are essentially giving your child a debit card with $500 on it. In this way, you give your child the resources for an emergency or a trip, while not exposing your bank account to the whims of a teenager. If this goes well, you can always add more money to their prepaid credit card account.
Finally, the prepaid credit card can be used as a universal gift card. If you want to give a gift of money, but you don’t want to limit a person to buying only at Starbucks or Target or Best Buy, you can buy a Visa prepaid credit card or Mastercard prepaid credit card for the same amount, letting the person choose where they spend their gift card money.
As you can see, there are a lot of different prepaid credit cards and a lot of reasons to have a prepaid credit card. These are just some of the ideas about using prepaid credit cards, but if any of them sounds like something applicable to yourself or your situation, take a look at the prepaid credit card section the next time you’re at Target or Wal-Mart. Generally speaking, you’ll find the pre-paid credit cards near the gift cards and the candy bars on the checkout isles.
This entry was posted on Tuesday, May 26th, 2009 at 5:54 pm and is filed under Credit Cards. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
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