How prepaid Credit cards work

Prepaid cards are credit cards where the balance is paid up front.  This means that a person who cannot or does not want to get credit can use credit card payment systems in shops and over the internet.

With the growth of the internet as a channel for selling products it has become harder for those who do not use credit cards to take advantage of the cheaper products and wider choice that is available over the internet.  Prepaid credit cards deal with this issue.

A prepaid credit card is a full credit card with a separate account from the main bank account and a credit card number that will mean that it can be used on internet and telephone transactions.  However, unlike a standard credit card it does not have the ability to build up a substantial debt as the card has to be paid up front and can only charge what is actually in the account.

These cards can be used for teenagers who are learning how to use bank products such as credit cards or check books.  In this way no sudden debt builds up, which can often happen if a person gets a credit card for the first time.  This can be good for both the self esteem of the teenager and the financial situation of the parent.

For students, prepaid cards are often the first step to independence.  There is no need for a co-signatory as there is under the Credit Card Act for other cards where the holder is below 21 years old.  A co-signatory credit card is seen as the next step for independence for students.  These mean that credit limits cannot be raised except through both signatories agreeing.

Prepaid credit cards are often not counted for credit ratings.  It is important to check whether the prepaid card will be reported to credit agencies if one of the aims of taking out the credit card is to rebuild the credit.  The types of credit card that are best to use in this situation are secured credit cards or co-signed credit cards.

Prepaid cards can also be an alternative to a checking account for a teenager who is not yet able to, or ready to run, one of these accounts.  In this way the teenager can be encouraged to add to the card account through part time jobs.

There are also stricter fees attached to prepaid credit cards as they do not attract the interest on borrowed money that standard credit cards do, although they rarely pay interest on balances.