What is a 'Prepaid Credit Card'

A prepaid credit card is a secured card issued by a financial institution that has been secured with a prepayment. These cards can be compared to prepaid debit cards which use preloaded funds for transactions.

BREAKING DOWN 'Prepaid Credit Card'

Prepaid credit cards can be utilized by borrowers with a thin credit profile or also by borrowers with a low credit score. Prepaid credit cards differ from prepaid debit cards in that they require a credit check and credit approval from the issuer.

Prepaid Credit Card Approval

Prepaid credit cards are also known as secured credit cards. They require the same credit application process as a standard credit card. These cards can be good for borrowers seeking to establish credit or improve their credit score. Secured borrowers are generally considered higher risk to lenders because they do not have an extensive credit history to base a credit decision on or their credit score may be low due to past delinquencies. Secured credit card issuers generally allow credit approvals for a wider range of borrowers because the card is secured with an initial collateral payment.

If a borrower is approved for a prepaid credit card the terms of the credit card are contingent on a collateral payment or security deposit. Many prepaid credit card issuers will approve borrowers with a security deposit of approximately $200. Once the collateral payment is made the card is issued and the borrower can use it in transactions for payments up to the credit limit. A secured credit card issues monthly statements, requires borrowers to make monthly payments and reports payment history to credit agencies. A borrower is required to make monthly payments outside of the funds initially used to secure the card. An issuer may report delinquencies to credit agencies up to a specified time before choosing to use the secured funds for payment which in some cases can negatively affect a borrower if they are delinquent.

Secured credit card issuers may offer varying credit limits against secured collateral. Some issuers may only offer borrowers the collateral payment limit while others may offer twice the limit. Credit card issuers may also increase the credit limit for the borrower over the life of the relationship. In some cases credit issuers may credit the collateral to the credit card after a prolonged period of time however most often borrowers are typically only rewarded with credit limit increases.

Prepaid Debit Cards

A prepaid debit card allows a person the convenience of a payment card without any debt. A consumer can use prepaid debit cards to purchase items online or in person. Funds on the prepaid debit card may come with the card at the time of purchase or they may be added at merchants affiliated with the card. Prepaid debit cards are a convenient way of storing money for purchases and electronic transactions. They can be issued by credit issuers such as American Express or PayPal however they do not require a credit check and are not associated with a consumer’s credit history. Cards with insufficient funds stored will be denied in electronic purchases.

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