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Prepaid Credit Cards- Benefits,Types Research Team | Posted On Monday, September 24,2018, 03:03 PM

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Prepaid Credit Cards- Benefits,Types



Prepaid Credit Cards are issued by banks and financial institutions and function in a way similar to regular credit and debit cards. They come loaded with funds, which is the maximum spending limit and cannot be exceeded.

The company might charge a small issuance fee for the cards, but generally not many formalities are involved in getting a prepaid credit card. The Credit Score which is an important factor for most financial transactions is also not very significant for a prepaid credit card, as the holder uses own funds which have been loaded onto the card.

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How does a Prepaid Credit Card work?

Carrying hard cash around is not practical and if the cash is stolen, it is lost forever. For convenience, credit cards and debit cards are used. Credit cards have a line of credit which is extended by the financial institution and interest is charged on outstanding dues.

Debit cards are linked to the holder’s bank account and use funds from there, but offer an overdraft facility. These two cards tempt the user to spend heavily. Prepaid credit cards neither have a credit line nor are linked to any account, and hence they cannot be used once the loaded balance is exhausted. People cannot be tempted to use more than what they have and land themselves in debt and pay interest and thus, they are a more economical choice for users. 

Prepaid Credit Cards are issued by a financial institution and branded by major credit card companies like Visa and MasterCard. Money is loaded in the card and can be used as long as there is balance in the card. These cards are accepted at most places where regular credit cards are used. They can be used for making purchases at physical stores or even online.

Types of Prepaid Credit Cards

  1. Open Looped Cards – the most common type of prepaid cards around, these are branded with the logo of the service provider like Visa or Master Card. They are issued by banks in partnership with the service provider. They are accepted at most merchant stores and sites.
  2. Close Loop Cards – these cards can only be used at a specific merchant and their related chain stores. For example, gift cards that are purchased at Shoppers Stop can only be used at their stores.
  3. Semi-Open Looped Cards – such cards are hybrid cards that can be used at many merchant outlets. These merchants are all affiliated to the issuer of the card.
  4. Reloadable Cards – reloadable cards come with an option for the holder to top-up the balance in the card. When the balance is low, the user can load more money and continue to use the card.
  5. Non-Reloadable Cards – this type of cards can only be loaded once. When the preloaded balance is used up, the card cannot be used and must be disposed of.

SEE ALSO: Payday Loan with Bad Credit

Benefits of Prepaid Credit Cards

  • Prepaid Credit Cards reduce the hassle of carrying cash around. People don’t usually carry coins with them, and this makes tendering the exact change difficult. This is no longer a concern.
  • Customers can use the cards without worrying about over spending as it is impossible to spend more than the loaded balance. In the absence of a credit line or loan, there is no chance for the user to get into debt.
  • They can be obtained easily from financial institutions with minimal formalities. People with low credit rating can also avail this service.
  • Open Looped Cards can be used at ATMs to withdraw cash.
  • Companies can pay salaries by way of prepaid cards, which is especially useful if the employee does not hold a bank account.
  • These cards can be used as gift cards or travel cards when the holder is travelling.
  • Using prepaid cards gives many benefits like cash back offers and reward points.
  • Some cards give the user a chance to track usage and spending, online or on the phone. This feature comes in handy for the sake of budgeting and controlling expenses.

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