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What Is A Prepaid Credit Card And How Does It Work ?

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Fincrif India

Oct 3

01:41 AM

An amount of money preloaded on a prepaid credit card is available for use immediately. In the same way that a debit card works, your card's balance is reduced when you make a purchase. In this situation, unlike with secured or standard credit cards, you are not 'borrowing' money from the card issuer.


Prepaid credit cards may be an alternative for you if you require a credit card but are not qualified to obtain one owing to a poor credit score. Prepaid credit cards offer a number of advantages and make a great alternative to cash and conventional credit cards. Discover all there is to know about prepaid credit cards by reading on.

What is a Prepaid Credit Card ? 

An amount of money preloaded on a prepaid credit card is available for use immediately. In the same way that a debit card works, your card's balance is reduced when you make a purchase. In this situation, unlike with secured or standard credit cards, you are not 'borrowing' money from the card issuer. In other words, a prepaid credit card is comparable to a debit card and has no negative effects on your credit report. 

Types of Prepaid Credit Card 

Prepaid credit cards come in open-loop and closed-loop varieties.


Open-Loop: A prepaid credit card with an open-loop network can be used wherever credit cards are accepted. If your open-loop prepaid credit card, for instance, carries the Visa logo, it will be recognised at any store, location, or ATM that takes Visa cards.


Closed-Loop: A closed-loop prepaid credit card, commonly referred to as a single-purpose card, is restricted to use at a single retailer or collection of retailers. For instance, you could only be allowed to use the card at a particular chain of grocery stores. Prepaid credit cards with closed loops often don't have the logo of a credit card network.

Benefit of Prepaid Credit Card 

Here are a few advantages of using prepaid credit cards:


Does Not Require a Credit Check: There is no credit check necessary to apply for a prepaid credit card. As a result, it is a great choice for those with bad credit histories or low credit ratings.


Offers a Safe Alternative to Cash: A prepaid credit card is a secure and practical substitute for cash.


Has No Requirement for a Bank Account: A prepaid debit card can be obtained and used without a bank account. Contrary to debit cards, prepaid credit cards do not need you to deposit money into a bank account; but, if you wish, you can do so from a checking or savings account.


You won't Get into Debt: Due to the fact that you are spending cash that have already been placed onto the card, you won't have to worry about accruing credit card debt.

How does Prepaid Credit Card Work ? 

Prepaid credit cards operate as follows:


  • Prepaid credit cards operate similarly to debit cards, with the exception that they use the money that has already been placed onto the card rather than taking money out of your bank account. 

  • You can refill your top-up credit card in the future to add more money because the cards are reloadable. Additionally, the cards are supported by credit card issuers like Visa, American Express, and MasterCard, who also offer many of the same safeguards. 

  • Prepaid cards are always available; no credit check is ever necessary.

Drawback of Prepaid Credit Card 

There are several negatives that should be taken into account.


High Fees: The fees associated with prepaid credit cards are perhaps their biggest drawback. There are fees associated with many prepaid credit cards, which may include the following:


  • Fees for activation

  • Maintenance fees on a monthly basis

  • Payment for reloading or replacing a card

  • Buying charges

  • Balance or transaction fees for ATMs

  • Cheque deposits charges

  • Cost for declining a transaction

  • Inactivity charges

  • International transaction costs

  • The cost of customer service inquiries


Doesn't Raise Your Credit Score: Because prepaid credit cards aren't considered a form of credit, your activity isn't recorded to credit bureaus. They are not a great approach to improve your credit because of this.


Offers Less Protection Against Fraud and Liability: Prepaid credit cards occasionally feature the complete range of safeguards available in traditional credit cards, but they rarely do.

Conclusion 

A prepaid card is a fantastic choice if you are just starting to establish your credit and are worried that you won't be accepted for an unsecured credit card. Due to the lack of a formal credit history requirement, prepaid business credit cards allow you to use plastic money even if you don't have any. College students and other young adults who want to develop sound money management skills can use prepaid credit cards instead of the majority of unsecured credit cards because they don't require as much financial commitment.



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