Prepaid Cards – How They Work

Today we will be discussing the difference between a standard credit and prepaid cards. They work very much the same at point of sale, but are quite different in how they are funded and used.

A standard credit card has a set credit limit. The card has a zero balance when it is first activated and any money spent on the card is borrowed. Typically these cards have 30 day grace periods, after which point you will owe interest on the money you borrowed. Prepaid cards work the same at the time that you make a purchase, but they are not something to help your credit. Instead you put money on to it from your personal funds before using it at a merchant.

The amount of your purchase is reduced from the amount of money you have on the card. In this way they work more like gift cards, only they aren’t for specific stores and they can be refilled. Only certain gift cards can be refilled. There is no interest because you are not borrowing money. So why should you get a prepaid card? Well first, you can use them wherever that credit card type is taken, so for example if you have a Visa prepaid credit card you could use it anywhere that Visa is accepted.

Also, they can be a great way to get your kids used to having a card and spending money on the card, without having to worry about them racking up debt along the way. They can be used as a safe learning tool for financial planning and budgeting.