- Credit Card Receivables
- Credit card receivables, also known as credit card factoring, is a type of financing available to businesses that are paid by customers with credit... <a href='/glossary/what-is-credit-card-receivables' title='See the full definition of Credit Card Receivables'>read more</a>
- Credit Score
- A credit score is a number generated by a statistical system used to rate the credit of an applicants according to various characteristics relating to... <a href='/glossary/what-is-credit-score' title='See the full definition of Credit Score'>read more</a>
- Line of Credit
- A line of credit is a revolving (re-usable) credit account that allows account-holders to borrow money and repay it any time during the term of the... <a href='/glossary/what-is-line-of-credit' title='See the full definition of Line of Credit'>read more</a>
- Secured Line of Credit
- A secured line of credit is a credit account extended to a business by a financial institution wherein the creditor has established a lien against the... <a href='/glossary/what-is-secured-line-of-credit' title='See the full definition of Secured Line of Credit'>read more</a>
What are prepaid credit cards? Well, to start with, they're not credit cards. With traditional plastic, customers use a line of credit to make purchases and then either make payments over time or pay off the entire balance. With prepaid cards, customers load their own money onto the plastic by making a deposit with the issuer. Prepaid cards are more like debit cards, except they're not linked to a checking account.
Surprisingly, gift cards count as prepaid cards. The ones being discussed here allow consumers to use them anywhere their payment network (American Express, Discover, MasterCard or Visa) other is accepted – not just a single retailer. These gift cards also allow customers to keep topping up the same bit of plastic by adding money whenever they wish. In industry jargon, they are "general purpose reloadable cards" (GPRCs).
While GRPCs are highly popular in the US, if you strip out gift cards, the figures shrink enormously. GPRCs alone are still showing very rapid growth, however. In 2014, the Federal Reserve Bank of Kansas City noted that they appeal particularly to those who lack bank accounts, and other studies suggest they're especially popular among younger, debt-conscious people. Meanwhile, many governments and employers find them convenient for paying wages and welfare entitlements.
The Worst Prepaid Credit Cards
Not many years ago, it was easy to find horror stories about rip-off prepaid cards that provided few consumer protections while charging extortionate fees. Those stories are fewer now, not because such products no longer exist (they do), but because many much better cards have entered the market. Today, these products really do include the good, the bad and the plain ugly.
As of December 2014, prepaids are effectively unregulated. In November 2014, the Consumer Financial Protection Bureau warned about some of the traps that still await unwary Americans, including:
- High hidden fees that come as a surprise. Unscrupulous issuers don't fully disclose their fee structures upfront.
- Lost card equals lost money. Issuers can refuse to help when a card is lost or stolen. It's possible to lose all the money loaded onto it.
- Issuers aren't obliged to help with disputed or fraudulent transactions. For example, if someone's charged twice for the same purchase in error, she'd better hope the retailer's willing to reverse one, because the card issuer can simply shrug.
- Charges to check balances. Prepaid card issuers rarely send out statements. And some charge high fees to access account information online or over the phone.
The Best Prepaid Credit Cards
Luckily, in recent years a number of new players -- including household-name retailers and credit card companies -- have entered the market, and most of these offer affordable products with transparent, sensible fees, good customer service and worthwhile consumer protections. However, some of the old rip-offs are still out there.
This makes it essential to sort the plastic sheep from the goats. How can someone do this? It involves a comparison shopping exercise, the reading of some small print and a suspicious attitude. Some cards that can be purchased in stores come in sealed packs. Don't assume that the fees listed on the outside (commonly those for card activation, monthly maintenance, ATM use and accessing balance information) are the only ones that will be charged. Search online for full agreements, and if they're not easy to find, assume the issuer has something -- maybe a lot -- to hide.
"Real" Credit Cards Usually Better
Some people with mainstream credit cards in their wallets like to have a prepaid card too for when they're shopping online or visiting a foreign country. They believe this makes them less vulnerable to fraud or other theft. That's generally a mistake. By Act of Congress, fraud losses for users of proper credit cards are capped at $50, and in reality, that's almost always waived. Prepaid cards may offer zero protection.
Of course, not everyone has a high enough credit score to qualify for a real credit card, but many of those may be able to get a "secured" card: one that requires an upfront deposit equal to the credit limit. This would provide the statutory protections of credit cards, along with other benefits.
However, even secured credit cards have minimum -- though low -- credit thresholds, so GPRCs retain a role in many lives. Those most likely to want one are usually drawn from the most financially vulnerable groups in society. And that's why finding the best and avoiding the bad and the ugly is so important.