What is a prepaid credit card?

Prepaid cards are not the same as credit cards. Unlike traditional credit cards, activity from a prepaid card is not reported to the three credit reporting agencies (Experian^®, TransUnion^®, and Equifax^®) and will not help in establishing or maintaining your credit score. Known as general purpose reloadable cards (GPRs), prepaid cards work similarly to gift cards and likewise have no bearing on your credit score.

Although they can be used to pay for services, online purchases, pay bills, and to withdraw cash from ATMs, prepaid cards do not come with a credit limit the way credit cards do. When you make a purchase with a prepaid card, you are using your own funds that you deposited onto the card rather than a credit limit or deduction from your bank account. In other words, you are not borrowing money.

How does a prepaid credit card work?

Prepaid cards can be loaded with funds through direct deposits or purchased at retailers. They can be accepted at many major retailers and can eliminate the need to carry cash. There could be associated fees with reloading and using the card with funds, so be sure to check out the terms of the card before you commit to one.

Funds on a prepaid card may be covered under the Electronic Fund Transfer Act (EFTA), known commonly as the Prepaid Rule. This could offer some protections in cases of lost or stolen prepaid cards. Be sure to read over the terms and conditions of your prepaid credit card for more information about protections for your card.

Do prepaid cards build credit?

Unlike a credit card, funds from a prepaid credit card are not loans, so what you do with them isn't reported to the credit bureaus. If anything, they're more similar to debit and gift cards in that you are using your own funds to spend money.

When should I use a prepaid card?

A prepaid card can be useful for setting budgets, managing expenses and providing allowances to family members. They can't, however, help you build up your credit score. Traditional credit cards could be a better option for your finances if you are looking to build your credit.