A credit card can either be useful or harmful, depending on the spending practices and financial capability of the cardholder. Many people go straight ahead and apply for a credit card without realizing that a credit card entails a huge responsibility on the part of cardholder. The situation is not exactly good for banks and credit card companies as well, since they also face some credit risks and potential losses (from cardholders that fail to pay their bills) with every credit card application that they approve.
To make matters favorable for both parties, the idea of a prepaid credit card was born. Realizing that credit cards need to be more affordable and yet functional both for the cardholder and the company, credit card agencies came up with a card that offers the same convenience and accessibility of a conventional credit card, but also allows the cardholder to take full control of his expenses.
What Is A Pre-funded Card Or Prepaid Credit Card?
A prepaid card is reloadable and sometimes pre-loaded card that bears a credit card name (such as Visa or MasterCard). In a prepaid credit card, the cardholder pays for his or her purchases using the "stored value" in the card, and is used just like a credit card since it holds a credit card brand.
Although the prepaid credit card, also called pre-funded card, is often compared with debit cards and debit credit cards, it is technically not a credit card nor a ebit card. A prepaid credit card is not tied or connected with a bank account, and it does not have a credit line.
Since a prepaid credit card does not have a credit line and does not require cardholders to open an account with a high amount, it can be legally issued to minors aged 13 and above. As such, many young people today get a prepaid credit card as gift, and often use it for shopping online.
How Does A Prepaid Credit Card Work?
A cardholder can only spend within the loaded funds of the prepaid credit card. Since it carries the Visa (or other credit card) brand, it can be used anywhere, at any store that accepts credit card purchases. Once the card runs out of funds, cardholders can reload it in the bank or credit card agency that issued the card, or through direct deposit (from salaries, tax refunds, social security, etc.). Some prepaid credit card providers also allow cardholders to withdraw (through ATM) the funds they have loaded in the card.
Prepaid credit card users can only spend within the amount loaded in the card, so the tendency to spend beyond one's financial capacity is very minimal. Also, because cardholders are not using the credit card company's money, they don't have to worry about monthly credit card bills and high interest rates. Prepaid credit card users are only charged with fees for the use of the card, such as service fees, activation fees, renewal fees, and others.
Given all these information, we can say that a prepaid credit card is promising financial solutions that can help people achieve purchasing power without spending beyond their financial limits. Prepaid credit card allows people to enjoy the convenience, accessibility, and purchasing power of a conventional credit card minus the hassle of monthly bills, high interest rates, and potential debt.