Prepaid Debit and Credit Cards

What is the difference between prepaid debit cards and prepaid credit cards?

Prepaid credit cards, also known as secured credit cards, allow you to use credit in exchange for a certain amount of money that you give to the credit card issuer to hold in a savings account. Unlike a prepaid debit card, a prepaid credit card makes purchases on credit, which must then be repaid using funds from another account. Every time you make a purchase, you promise to pay the credit card with funds not drawn from the savings account. The money held by the credit card issuer acts as collateral in case you are unable to pay off your balance.

A prepaid debit card functions similar to a bank debit card or gift card. There has to be enough funds attached to the card before you can make a purchase. Every time you make a purchase, the funds on the debit card is reduced by the amount of the purchase. Once all the money on your debit card is used up, you can no longer make purchases unless you recharge it.

With a prepaid debit card, the limits on your spending are directly based on the amount of money you add to the card. This is not the case with a prepaid credit card. Your prepaid credit card will usually have a credit limit and you can only make purchases each month up to your limit. Although some cards will allow you to go over your credit, fees will be charged.

Prepaid credit cards are often used as a way of building good credit, especially if you have a bad credit history. Prepaid credit cards report every month to the credit bureaus. Making regular small charges and paying them off every month will show that you are financially responsible, which can help increase your credit score. However, if you do not know how to handle credit, you can still end up in trouble, as it can charge interest rates anywhere from 15% to 23%. With prepaid debit cards, since you can only spend money you actually have, you won’t have to worry about being in debt.

A prepaid credit card offers protection if your credit card is stolen. The federal law limits your liability for any unauthorized transactions. When you lose your prepaid debit card, it’s like losing cash and you cannot get it back. However, a prepaid debit card is better than the standard debit card because since your prepaid debit card isn’t directly connected to your bank account, you do not have the risk of having your bank account drained.

One of the most important things to consider when deciding between a prepaid credit card and a prepaid debit card is that only a prepaid credit card has the ability to improve your credit score.  Prepaid debit cards do not show anything about your borrowing or repaying behavior, and thus have no impact to your credit score. Read more about factors that affect your credit rating.

Debit Cards and Prepaid Debit Cards

What is the difference between a debit card and a prepaid debit card?

Since both are called debit cards, many people tend to confuse these two types of cards. However, a prepaid debit card is very different from a bank debit card. A bank debit card is directly linked to your checking account, whereas a prepaid debit card is not. With a prepaid debit card, you pay in advance to add the funds to your card so that when you make a purchase, money gets deducted from the funds that were loaded onto the card. For example, if you deposit $400 onto your prepaid credit card and you spent $50, then you only have $350 left to spend. In this way, prepaid debit cards function similar to a gift card. In most cases, you cannot spend more money than what you put on your prepaid debit card. Once you use all the funds on your prepaid debit card, you are no longer able to make any purchases unless you reload the card with additional funds.

With bank debit cards, if you opt into your bank’s overdraft protection service, the bank covers the amount of a purchase that exceeds what you have in your checking account. Later, you will have to pay the bank the overdraft, along with a fee for not having enough funds in your account.

There is less consumer protection with prepaid debit cards in the event of loss or a disputed charge compared to bank debit cards. Losing your prepaid debit card is like losing cash. However, since prepaid debit cards are not linked to your bank checking account, you don’t have the risk of having your checking account drained when you lose your card. Your losses are only limited to the amount on your prepaid debit card.

Some people like to use prepaid debit cards because they find it as a way to control their spending. They decide how much they want to put on their prepaid debit card, thus putting a limit on how much they want to spend. However, keep in mind that prepaid debit cards can also have a lot of fees, including reload, account maintenance, and activation fees.

Read more to see if you should apply for prepaid debit cards.

Are Prepaid Debit Cards Good For You?

The popularity of prepaid debit cards has been rising in the last several years. You can qualify for a prepaid debit card regardless of your credit history. Since prepaid debit cards are co-branded with MasterCard or Visa, you can use these cards to pay bills almost anywhere regular credit card payments are accepted. Many people use these cards overseas for convenience.

Whether prepaid cards are good or bad for you really depend on how you use them and how responsible you are. Prepaid debit cards make sense for some people who are trying to control their spending because they can’t spend more money than what is loaded on their card. This way you wouldn’t carry a credit balance, have any overdraft fees to pay, or be in debt. Thus, if you think you have trouble handing credit, a prepaid debit card may be an option you want to consider.

Prepaid debit cards also have a plethora of fees, including reload, account maintenance, and activation fees. Despite these fees, some people still find it better to use a prepaid debit card as opposed to a regular credit card. This is because if you are bad in handling credit, these fees may be lower than the amount of interest you would have to pay with a credit card if you carry a balance at the end of the month. However, in recent years, some card companies started offering prepaid debit cards with significantly fewer and lower fees. Some cards will even waive certain fees if you set up direct deposit. Make sure you understand what all the fees are before signing for any card. As with any financial product, it is important to shop around before you make any decision. Compare the fees and features of different prepaid cards to ensure that you get the card that is best suited for you.

Do prepaid debit cards build credit?

Using prepaid debit cards will have no impact on your credit score and you will not be able to build a credit history. This is because when you use a prepaid debit card, you are not borrowing or repaying money, and thus, the major credit bureaus often do not look at your prepaid debit card behavior when determining your credit score. For someone who is trying to increase their credit score, consider applying to a prepaid credit card as opposed to a prepaid debit card.

Who uses prepaid debit cards?

You might sign up for a prepaid debit card if your bank doesn’t carry MasterCard or Visa branded cards. Parents can also load money onto the card for their children to teach them good money management skills. College students may also find that using prepaid debit cards is convenient in terms of helping them easily pay for books, food, and other expenses.

What is a Credit Bureau?

Credit bureaus, also known as credit reporting agencies, are not lenders, but independent agencies that get information from credit grantors and other sources regarding individuals’ credit behaviors. The organizations compile the information in the form of a credit report and also use this information to create credit scores, which they sell for a fee to creditors and consumers. Banks, mortgage lenders, credit card companies and other financing companies need this information from credit bureaus so they can make a decision on whether or not to grant a loan to an individual. The credit bureau itself does not decide whether an individual qualifies for credit, but rather, it only collects information related to the person’s credit history.

The three major credit bureaus are Equifax, Experian, and TransUnion. Although these three organizations share information, each maintain its own credit report and credit score. These credit reporting agencies calculate credit scores using their particular statistical model. Since there is no specific formula that all the credit bureaus use to calculate a person’s credit score, your score at one credit bureau may be higher or lower than your score at another bureau.

In summary, main roles of a credit bureau are to:
a) provide users with accurate information and help give creditors an objective way of processing credit applications
b) help lenders reduce the risk of granting loans to consumers who are likely to default

Different types of credit scores
The major credit bureaus sell FICO credit scores under different names, but they are all developed using the same methods by Fair Issac.

Credit Bureau                                       FICO Score Name
Equifax                                                    Beacon Score
Experian                                                 Experian/Fair Isaac Risk Model
TransUnion                                            FICO Risk Score, Classic

However, these are not to be confused with the credit bureaus’ own credit score. For example, Experian’s individual credit score is called PLUS, ranging from 330 to 830. Equifax’s Credit Score ranges from 280 to 850. TransUnion’s credit score, called TransRisk, is similar to the FICO score, ranging from 300 to 850. In addition, these three credit bureaus have jointly introduced another credit score called VantageScore to compete with the FICO score. The VantageScore ranges from 501 to 990.

How to Establish Credit

When you don’t have a credit history, it can be difficult and frustrating when you need to obtain a type of loan or get approved for a credit card. However, you might be wondering, if you don’t have credit and no one is even giving you a chance, how can you ever establish credit?

Below are ways to establish credit for the first time:

1)      Use someone else’s good name -You can boost your credit history if you are added to someone else’s credit card as an authorized or joint user. Many issuers will import the history of that account onto your own credit report. However, make sure the person who is adding you is responsible with credit. Although you may be added as an authorized user and are not responsible for paying the bill, the original account owner’s mistakes can still show up in your credit report.

2)      Get someone with good credit to cosign a loan with you – Not only is having a co-signer a good way to build credit, but you can also get a better rate on a loan application. However, make sure that payments are always on time

3)      Set up a checking and savings account – You do not need any credit score to open up a checking or savings account. Although they don’t show up on your credit report, lenders see them as important signs of financial responsibility and stability. When you have an active bank account in good stand, you are proving that you can manage money.

4)      Employment history – Lenders want to see if you are able to hold a job or if there are periods of unemployment. Your ability to hold a stable job can help the likelihood of getting approved for credit.

5)      Have utility bills under your name – Having an electric, gas, telephone, cable, or water service bill in your name and paying them off will show lenders that you are financially responsible.

6)      Residence history – Lenders want to see whether you rent or own. It is helpful if you have a stable residence or if you own a home.

Alternative Cards

If you can’t get a regular credit card, you might want to apply for a gas or department store credit card, which are usually easy to get, or apply for a secured credit card. When used properly, these types of cards can help boost your credit history. However, make sure that the lenders actually report your credit activity to the credit bureaus because otherwise, it will do you no good.

Get Your Free Credit Report

Whenever someone applies for credit or a loan, the creditor may look at the credit report and credit score from all three credit bureaus. The information on your credit reports will be the deciding factor for whether or not you get approved for credit. This is why it is good to monitor your credit report for any false information. Having errors on your credit report may be an indication that someone else’s information might be mixed in your file or that you are a victim of identity theft. Identity theft can go on years before it is detected and it is important to clean up your credit report before you apply for any new accounts. Thus, it is good to know what makes up a credit report and what to do if there are errors.

What is the Fair Credit Reporting Act (FCRA)?

The Fair Credit Reporting Act (FCRA) is a federal law that was passed in 1970, defining how credit bureaus should operate and how they should collect, disseminate and use consumer information. The FCRA gives consumers the right to have an accurate credit report. If you find errors in your credit report, you can dispute these errors with the credit bureaus and they are required to do an investigation and correct any errors. This includes your ability to remove outdated, negative information, such as information that is 7 years old or 10 years in the case of bankruptcy.

What is the Fair and Accurate Credit Transactions Act (FACTA)?

The Fair and Accurate Credit Transactions Act (FACTA) was passed in the United States in 2003 as an amendment to the existing Fair Credit Reporting Act (FCRA). The FACTA act gives you the right to order one free credit report every year from each of the three major credit bureaus (Equifax, Experian, TransUnion). This enhances protection for identity theft and requires regulators to be more proactive in spotting identity before it occurs by looking for suspicious activities.

It is recommended to request a free copy of your credit report from one bureau every four months so you check your credit report more than once a year. It’s advised to check your credit report regularly so you can correct any errors on your report as early as possible. You can order your free annual credit report through AnnualCreditReport.com. However, your credit scores are not included in these reports, but can be purchased for a small fee.

What happens if you don’t pay back a payday loan?

Before you take out a payday loan, it’s very important to fully understand the terms. Payday loans have high penalties because the lender is taking a large risk by lending to people without running credit checks. Different lenders have different approaches when you do not repay your payday loan on time. Some lenders will allow you to “roll it over” so that the loan is extended. Although you do not have to pay off your loan right away, fees will keep accumulating until you do. Lenders will continuously try to take the money from you until you are able to fully pay back what you owe. As soon as you have problems repaying your loan, talk to your payday lender and try to arrange a viable repayment plan.

It’s also a good idea to check whether your payday lender is a member of a trade body such as the Consumer Finance Association, the Finance and Leasing Association, the Consumer Credit Trade Association or the BCCA. Many of these associations have a charter where its members have to follow stringent rules, such as:

a) Tell borrowers how the loan works and the cost of the loan before they apply
b) Freeze interest and charges if they make repayments under an agreed and reasonable repayment

Debt collection
If you have not paid back your loan within a certain amount of time, the payday lender may pass your case onto a debt collection agency. This can be stressful as you are likely to start receiving a lot of letters, phone calls, and even home visits demanding the money.

Complain

If your payday lender is using aggressive debt collection practices, or you think you’re being unfairly treated, you can write a complaint stating why you think the lender is not adhering to the Office of Fair Trade’s irresponsible lending guidance. If you do not receive a satisfactory response within eight weeks, you can escalate your complaint to the free and independent Financial Ombudsman Service, which settles disputes between lenders and consumers.

Difference Between Soft and Hard Credit Inquiries

Did you know that when a company checks out your credit report, it can temporarily damage your credit sore? A credit inquiry is a request to check your credit. There are two kinds of inquiries that can appear on your credit report: hard credit inquiries and soft credit inquiries. While both types of credit inquiries enable a person, such as you or a lender, to view your credit report, only hard inquiries can negatively affect your credit score.

What is a hard inquiry?

Hard inquiries occur when lenders or credit card issuers check your credit report to help them make a lending decision. This usually happens when a consumer applies for an auto loan, credit card, or mortgage. Anytime that you are getting a loan or a new credit card, the lender conducts a hard pull on your credit report. Generally you have to authorize a hard inquiry.

How do hard inquiries affect your credit score?

Hard inquiries can lower your credit score and remain on your credit report for two years. These inquiries can have a greater negative impact if you have few accounts or a short credit history. However, as time goes on, the damage to your credit score will decrease until the hard inquiry falls off your credit report. Since hard inquiries can drop your score by a few points, it’s usually not a good idea to apply for new credit cards before you apply for a mortgage loan. This is because you want to have as high of a credit score as you can so that you can qualify for the best interest rate available.

What are soft credit inquiries?

Unlike hard inquiries, soft inquiries can occur without your permission and they have no effect on your credit score. Often times, you are not even aware that a soft inquiry has happened. Soft inquiries are when people check your credit report not to make a lending decision, but rather to perform a background check. Credit cards and mortgage lenders use them when they decide whether to pre-approve you for a card or a loan. A common misconception is that checking your own credit score will hurt your credit score. This is not the case. When you check your own score, it is considered a soft inquiry. Thus, you can check your credit score as often as you like and it will never lower your credit score.