The objective of this article is to provide an overall explanation on how prepaid debit cards operate. This information will give some key differences between a traditional credit card and prefunded debit cards. It will tell you why prefunded debit cards can be a good choice for those that have bad credit.
As the name suggest prefunded debit cards require a checking or savings account to be established first, the same is true for prepaid credit cards. The company will then send the card out to you. Nearly all companies have cards that include the MasterCard or Visa logo, and appear just like a credit card. When making a purchase in a store or online they are used the same as a credit card. Considering the convenience, there are really no differences.
Most of us know that the way a traditional credit card operates is that your credit is reviewed and you are approved for a credit amount limit. You are then given the card and allowed to freely charge whatever you want and make monthly payments on it later.
This means if you happen to be an individual with negative credit, then you also know it is very hard to get a credit card.
A prepaid debit cards does not operate this way. They are also called reloadable check cards, or prefunded cards. The reason they are different is that they are connected to a pre-arranged checking or savings account.
You start the account which you fund by putting up a cash deposit. The money is held in a FDIC bank. This means the money in that account is protected just like regular checking or savings accounts.
But, theses are not classified as a regular bank account. The chances are very good that the bank used by the card company will not be local to you. You would not be able to make routine deposits and withdrawals out of this account.
This account is set up for the purpose of issuing a Visa or MasterCard with a limit that is equal to the balance that is in the account. This is the reason they are call prepaid, prefunded, or reloadable debit cards.
Their appearance is exactly like regular credit cards. You use them at cash registers just like regular credit cards. But what is different is that any charge made on the card will have an equal deduction from the balance in your previously set up account. Then that new account balance also becomes the new remaining amount on the card you have left to charge things with.
As an example, say you established an account for $300. That company then immediately sends you a Visa or Master with the same $300 limit.
When you get the card you then charge $50 on it. The account you have already set up is correspondingly reduced by $50 and you now have $250 credit left to use on the card. After this, you send in a $25 payment which increased the account balance to $275. You now equally have a $275 charge limit on the card.
There are absolutely no credit checks and everybody is approved. Because of the way prepaid debit cards operate it compels them to be used more responsibly. There are no overdrafts or over the limit fees. If you attempt to charge something that exceeds the current account balance it will be the purchase will declined.
It is also because of these facts concerning prepaid cards that make them good choices for people with bad credit.
There is one significant difference from credit cards to be aware of and that is fraud protection. Customarily with normal credit cards, if it is stolen, or lost, you are only held liable for $50 of any unauthorized charges. But prefunded debit cards do not have that same protection. Which means it is very important to contact the company and have the card cancelled, or blocked, when you first learn it is missing.
Here are a couple of additional pros and cons of using a debit card:
Pros:
* Simple approval procedure, no credit checks are required, an easy option for people with poor credit
* Prepaid debit card has same usage as any MasterCard or Visa
* Can access cash from any ATM machine
* Because an account is connected to it with a routing and account number, you can set up direct deposit of your pay check
Cons:
* There is usually a one time fee to establish the account and activate the card
* Just like with credit cards there is usually a cash withdrawal fee when using a ATM
* The fraud protection features with regular credit cards may not be included with prepaid debit cards
* Some prepaid debit cards do not report your payment history to the credit bureaus, so they don’t help to repair credit
* Even though it seems like you are charging against your own money, the card company says it is a matching amount but not the same money. Therefore there is interest on your charges.
But after listing these things to be aware of, you should also remember prepaid companies are very competitive. As a result more companies are beginning to provide things previously not available like the fraud protection, overdraft protection, free ATM withdrawals, etc. Simply take a look at the feature a particular card may be offering.
In summary, a prepaid, or prefunded, or reloadable debit card allows you to only spend up to the amount you have pre-deposited into an established account. If you tend to overspend or would like to control your spending then a prepaid debit card could be a good solution. It will help you to better manage your money. They are also a great alternative for people with bad credit to get a Visa or MasterCard.
We hope that this article has been informative to you and helps you decide whether, or not, a prepaid debit card will help your situation.
BadCreditAssistance.com is a member of Consumers Info USA. We help people with negative credit report find the financial services that they need. Go Now to find out more information about prepaid debit cards and to submit a online application.
