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HomeBusinessUnderstanding Prepaid Credit Cards: Benefits and Limitations

Understanding Prepaid Credit Cards: Benefits and Limitations

Credit cards usually sound difficult to handle owing to easy extra expenditure with the available funds. The consequence is a balance that is chargeable with interest if not paid fully within the time limit. Alternative to this option, banks offer prepaid credit cards. These come preloaded with money, setting for customers a specific balance to spend which is easily visible and tracked through the credit card app. Consider the following benefits and limitations of prepaid credit cards to make your choice of prepaid credit card a well-thought-out decision.  

How Do Prepaid Credit Cards Function?

The prepaid credit cards function similarly to the debit cards. Both provide funds to the users. However, the difference lies in association with bank accounts. A debit card provides funds from a bank account. The prepaid credit card provides money loaded or deposited into the credit card by the user. Some of the cards are reloadable, thus allowing adding money as per the usage. Since the money is loaded into the card by the user, there is no debt or interest charge levied on the user.

Benefits of Prepaid Credit Cards

Let us begin with the advantages of prepaid credit cards: 

  • Substitute it as cash compared to conventional credit cards
  • There are no debts or interest charges
  • Useful as a gift card
  • They can be loaded with currency on abroad travel 
  • Easy to procure
  • These are safe and convenient 
  • It can be used to pay outstanding bills 
  • It can be used to credit a salary
  • You can also opt for open-looped prepaid cards
  • Does not require a specific credit card 
  • Easy trackability of the expenditure with a credit card app 
  • Inability to overspend the amount, thus purchasing goods within the limit is possible
  • Serves as a source for urgent transactions and purchases 
  • Not associated with a bank account 

Limitations of Prepaid Credit Cards

Everything that glitters is not gold. There are certain limitations associated with credit cards as well: 

  • Associated with multiple fees like transaction, activation, reloading, ATM withdrawal or inactivity fees and others 
  • Do not provide access to banking services 
  • It is not acceptable at all for the locations
  • Lack of money on a card means the inability to use it during an emergency 
  • The card is associated with credit rather than money. So, banks do not report to Canada’s credit reporting agency. Hence, no effect on credit score

Types of Prepaid Credit Cards

The different types of prepaid credit cards are as follows: 

  • Closed looped cards

These are generally gift cards. It is accepted only at the affiliated merchant outlets. It serves the function of buying goods and services at the specified outlets. 

  • Semi-open looped cards

It is a hybrid card, providing features of both open and closed-looped cards. It is also accepted by merchant outlets and chains, but the numbers are wider. The cards are generally issued by shopping malls or retail chains to be used at stores of such brands. 

  • Open looped cards

They are also known as open system cards and display the logo of the brand they represent. These are issued by banks associated with MasterCard, American Express or Visa. 

  • Reloadable cards

The customer can add funds to these cards after usage. The balance can be tracked using a credit card app

  • Non-reloadable cards

These are a type of gift cards that can not be reloaded. These are non-reusable cards. 

Frequently Asked Questions

Q1. What happens on the expiration of prepaid credit cards?

Ans. The money put in prepaid credit cards does not expire; however, physical cards do. The cardholder should contact the bank to easily get the new card with the same balance. 

Q2. What is a credit score?

Ans. A credit score is a three-digit score. The banks use it to predict consumer behavior and their ability to handle financial transactions. 

Q3. Who provides a credit score?

Ans. The credit score is provided by CIBIL or Credit Information Bureau India Limited. It is the leading credit information bureau in India. Their credit report contains a credit score or a three-digit number that represents a person’s creditworthiness on a scale of 300 to 900. A score of 680 or above is considered good.

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