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.