What is a Prepaid card?
Prepaid cards are a type or debit card that is similar to a stored-value or reloadable gift card. It can be loaded with cash and used anywhere MasterCard, Visa, Discover or American Express is accepted. Here are some reasons you might want one.
Prepaid cards: How do they work?
Canadian prepaid credit cards can be purchased at convenience stores, supermarkets, and other outlets as well as directly from the company that issued them. There is no credit required. You can only spend what you have put on the card. Although a prepaid card is not guaranteed to be approved, a bad credit history won’t stop you from getting one. However, it will not improve your credit score.
Who might use a prepaid card?
Hank has been having financial difficulties lately. This has caused a significant ding on his credit score and prevented him from being eligible for a credit card. Hank doesn’t like to have to carry a lot of cash so he uses his paycheck for prepaid cards and to pay his bills.
Types of prepaid cards
Reloadable Cards for General Purpose
This guide will primarily focus on this type of card. You load money on it and use it as a debit card. GPRs are typically marked with network brands such as Visa MasterCard, Discover, American Express or Visa MasterCard. They can be used wherever credit cards are accepted.
Gift cards
These cards are available in specific monetary denominations and can be used for purchases at certain stores (example: Amazon gift card). These cards are perfect for gifting as they can’t be reloaded.
Payroll cards
Some employees get prepaid cards with their salary amounts instead of a paycheck. The cards can be used to buy goods and services, and pay bills.
Prepaid cards vs. Credit and Debit Cards
You may now be curious about the differences between prepaid and debit cards. Although they may appear identical, their functions are different.
CREDIT CARDS
Credit cards allow you to borrow money that you have to repay. Interest will be charged if the balance is not paid by the due date. You must have good credit to get one. Responsible use of one will help you improve your credit rating. This can lead to lower rates on mortgages and car loans. However, recklessly using a credit card can result in overspending, debt accumulation and late payments, which could ultimately lead to damaged credit.
DEBIT CARDS
Your bank issues a debit card and links it to your savings or checking account. You own the money and there are no interest fees. However, overdrafts can result in penalties. You’ll need to keep track of the balance, just like your checkbook.
PREPAID CARDS
Prepaid cards allow you to spend money that has been loaded on them previously. They are not connected to savings or checking accounts. Prepaid cards work just like debit cards but you don’t need to have a bank account or good credit to get one. The card can be purchased in a fixed amount. However, you can always add more money to it. Your card will stop working once the balance has been reached unless you add additional money.
Here are some tips to help you protect your money
These are some tips to help you find the right prepaid card for you.
- Read the fine print. It might not suffice to read the website of the company. Before you buy the card, make sure to review the literature.
- You should look for cards that have low or no monthly fees. You will need to do some research to find the right one.
- Reloadable cards are available so you don’t have to pay an activation fee or fulfillment fee when you get a new card.
- You should look for cards that do not charge transaction fees and inactivity fees.
- Direct deposit is the best way to fund your prepaid cards. Direct deposit will help you avoid load fees and, in many cases, monthly charges.
- Prepaid cards are not meant to build credit. Major credit agencies won’t view prepaid cards as a way to chart your financial habits, just like checking accounts.
- Some cards offer overdraft coverage similar to a checking accounts. However, you will need to pay high fees for this.
- Many cards offer one to two ATM withdrawals per month for free, but charge extra.
- You can get cash back at the cashier on your card, which will reduce ATM fees.
- Some cards may not be protected in the event of loss or theft.