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Prepaid Credit Cards Vs. Regular Credit Cards

Updated on Jan 15, 2021
Prepaid Credit Card

The defining difference between a prepaid credit card and a regular credit card is that prepaid credit cards come with loaded money while a regular credit card works on borrowed money. These cards may generally work in a similar way for our day-to-day transactions but there are differences that are worth knowing if you want to manage your finances properly. 

Prepaid Credit Cards

Prepaid Credit Cards are essentially a type of secured credit card that has been secured with a prepayment. These cards are issued by banks and financial institutions for everyday transactions in a similar way as a credit card. Since you don't carry a credit balance and don't have to pay later when using them, it is not considered a true credit card. 

Similar to gift cards, with every transaction you make with the card, the money is deducted from the card balance till the funds get exhausted. In short, you only get to spend the amount of money that is loaded onto the card. Though prepaid credit cards can be reloaded, gift cards are one-time use. 

Unlike prepaid debit cards, which are sometimes linked to a checking account, prepaid credit cards are not linked to a bank account.

There are certain fees associated with holding/using a prepaid credit card. This may include a monthly fee, cash reload fee, transaction fee, ATM withdrawal fee, etc. Do check with your card issuer about the fees.

The biggest advantage of a prepaid credit card is that you don't incur debts or have to pay any interest. Since it always comes with a specific spending limit, it is ideal for people who tend to overspend if they use a credit card or a debit card with an overdraft facility. And if you are traveling.

Also, the credit score of the individual is not needed when applying for a prepaid credit card. Thus, people who lack a good credit score can go for such cards. Do keep in mind that prepaid credit cards have no effect on an individual's credit score. 

Listed below are some of the benefits of Prepaid Credit Card:

  • Prepaid Credit Cards can be an efficient budgeting tool as it helps you stick to the certain spending limit
  • Card issuance is straight forward: no employment verification/ no credit score 
  • No need to have a bank account 
  • Some banks allow ATM withdrawals
  • No debt/interests
  • Pay utility bills or any good and service 
  • Function as a gift card or travel card 
  • Pay employees' salaries 

Credit Cards


Credit Cards

Credit Cards including Visa, Mastercard, American Express are issued by banks or financial institutions allowing people to borrow money in the form of a card that has to be paid back in full amount by a certain date or in installments over time, with added interest and other agreed-upon charges. In simple terms, the issuing bank pays for your purchases on your behalf and you incur a debt that you will have to pay back later to the bank. 

As long as you pay the monthly payments on time, the loan will be interest-free. This is called the grace period in which you can pay the loan in full within a certain date without any interest. The grace period varies based on the credit card issuer.

When it comes to credit cards, there are different types that are available in the market today. Customers have the option to choose from a wide range of credit cards to suit their specific requirements - Credit cards for new parents, new immigrants, or simply collecting miles. For example, there are rewards credit cards, travel credit cards, shopping credit cards, cashback credit cards, prepaid credit cards, etc.

It is worth noting that sending money internationally through credit cards is always more expensive than other methods such as bank transfers, PayPal, etc.

Build Credit Score with Credit Cards 

The chances of getting a credit card are high when you have a good credit score or else it is likely that your application will get rejected. Before issuing the card, the card issuer will do a credit check and determine the credit line depending on your score. 


Credit Score

There are mainly two types of credit cards: unsecured credit cards and secured cards.

Unsecured credit cards simply mean you don't need to deposit any security or collateral because you have a good credit score and are considered a low-risk borrower. These cards have higher credit limits and lower interest rates as compared to secured credit cards. 

Secured credit cards on the other hand require you to deposit security or collateral. These cards offer lower credit limits and higher interest rates. However, with a secured credit card, you do have the chance to build an excellent credit score by paying the bills on time. The security deposits will be refunded eventually if you keep them in great standing. 

Secured cards are a great option for individuals with poor credit histories. Major credit agencies or credit bureaus keep track of payments and purchasing activity, so using the card responsibly will help build your credit score and further extend your credit lines.

Apart from the interest that credit card charges, there are several fees such as service fees, transaction fees, annual fees, late fees, etc, that can become quite costly. Make sure you read the fine print and check the fees before you decide to apply for one. 

Listed below are some benefits of credit cards:

  • You can build your credit score when used responsibly. This will help in obtaining loans or mortgages later in your life.
  • Security: If even your card gets lost or stolen, your funds are safe and will be reimbursed
  • Credit cards offer many rewards such as cash back, rewards points, travel, and shopping perks, etc.)
  • Many credit cards provide purchase assurance and extended warranties on your purchases. You can do a chargeback when the goods or services are not delivered.

We recommend that you work on building a good enough credit score to be able to increase your credit options in the future. Having a bad credit score or not having enough money to put down on a credit card greatly limits your credit card options. 

Conclusion

An alternative to the physical banknotes and coins, plastic money in the form of debit cards, credit cards, prepaid cards, etc. is part of what we call a cashless society. One of the biggest drawbacks of cashless transactions is the risk of overspending. When used responsibly, cashless transactions are faster, more convenient, and more secure.

Whether a prepaid credit card or a regular credit card best suits you depends on your financial situation. If you want to build your credit, go for the secured credit card. Or if you are looking for the spending flexibility provided by a credit card when a debit card fails, then a prepaid credit card is the best choice. 

Needless to say, you need access to funds to get a secured credit card or a prepaid credit card. Thus, start with saving money as the first goal.

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